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Don’t Ignore Your A/B Trust

There are many different kinds of revocable living trusts out there. It’s not really important that you understand much about all the difference kinds, but it is important that you understand what kind you have.

This article is focused on trusts for married couples, and in particular on what the trust says must happen when the first spouse dies. There are essentially, in very general terms, two different kinds of trusts a married couple can have. One, which we in the biz call an “A/B Trust,” specifies that when the first spouse dies the trust assets will be held in two (or more) trusts instead of just one. The share of the trust property belonging to the surviving spouse will be held in a Survivor’s Trust and the share of the deceased spouse will be held in a Bypass Trust (and possibly one other trust if the deceased spouse’s share is very large).

The other basic kind of trust for married couples does not require the trust to divide into two trusts. We call this a “Disclaimer style” trust. When the first spouse dies, the trust property remains just as it is, in one trust. However, if the surviving spouse thinks it would be a good idea to have two trusts, possibly for tax reasons or asset protection, he or she can establish a second trust by disclaiming some of the trust property.

So you see, both types of trusts can result in two trusts after one spouse dies. The difference between them is that with the A/B trust the split is mandatory. With the Disclaimer trust it is optional.

We used A/B trusts often in the days before the estate tax exemption got so high (now $11,180,000 per person). They enabled a lot of married couples to minimize or eliminate estate taxes. But now with such a high exemption very few couples need to be concerned about estate taxes.

We have been seeing surviving spouses who didn’t realize they had an A/B trust until they talked to us after their spouse died. And they are not happy. They now have a choice of splitting their trust into two trusts, already an expensive project, and filing two tax returns every year, or filing a petition for modification of the trust in court so that they won’t have to create two trusts.

For some married couples the A/B style is too complicated and not necessary. Only you, together with your attorney, can make that call. But don’t wait. While both spouses are alive, changing the trust is easy. Once one has died it becomes much more difficult (and therefore expensive).

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If you’re someone who needs to include Medi-Cal planning in your estate plan, we can help. For more information on what Medi-Cal planning should look like, visit https://absolutetrustcounsel.com/practice-areas/medi-cal-planning/ for even more resources to help get you started.