Many people have an A/B or A/B/C trust. These trusts serve several purposes. The letters don’t mean as much as the function of the trusts, but both the legal and accounting profession understand the “A” trust as a revocable trust holding a surviving spouse’s property. “B” and “C” trusts are irrevocable trusts that hold the deceased spouse’s property.
These trusts provide protections such as creditor protection, estate tax protection and future income tax protection.
So what do you need to know about the A/B/C trusts?
Example 1: Not Understanding Your Trust
Marty dies. Christie is the beneficiary of Marty’s “B” trust. Christie is surprised to find out that she only receives income from the “B” trust and can get principal, but only if she has no other money and then only for health and support. Moral of the story: she shouldn’t have been surprised because by its very nature a “B” trust must have certain limitations built in. Otherwise you lose the protections described above.
Example 2: Wife Changes Revocable ‘A’ Trust After Husband Dies
Marty and Christie have a second marriage. Each has two children from the previous marriage. Marty’s estate is $1 million of separate property, and Christie’s estate is $1 million of separate property. They set up a joint trust that leaves their estate equally to all four children. Sounds good, right?
When Marty dies, Christie follows the trust terms and puts Marty’s $1 million in the irrevocable “B” trust and puts her $1 million in the revocable “A” trust. So far, so good. But later Christie changes the “A” trust, leaving everything to her children. This means that Christie’s children get 100 percent of “A” and 50 percent of “B”; or, to put it another way, 75 percent of the total estate goes to Christie’s children, and 25 percent goes to Marty’s children. This result can be avoided with a little forethought.
Example 3: Irrevocable Trust Protects Children’s Inheritance
Christie dies. Marty does not divide the trust like he is supposed to. Instead he parties. Marty meets a younger woman, and they get married. They go on cruises, visit Europe, and live high. Marty dies and only $1 million is left. Marty’s third wife files a lawsuit to get what’s left in the trust. The court finds that the remaining money is Christie’s and should have been transferred to the “B” trust. Marty’s and Christie’s children split the inheritance four ways. The third wife gets nothing, as she had no rights in Christie’s property.
Example 4: Future Income Taxes
Jim and Alice Anderson have an estate of $8 million. They have an old A/B/C trust established when the exemption was $1 million. Jim Anderson has passed and the trust is divided equally between the “A” and “B” trust. The capital assets received a basis step up to fair market value when Jim died. However, when Alice dies there will be a basis step up only in the “A” trust assets.
Bob and Nancy Jones also have an estate of $8 million. They restated their trust in 2014 and optimized their future income taxes, eliminating the old “B” trust and substituting a new irrevocable trust in its place. The Jones trust will receive a basis step up when Bob dies and again when Alice dies, on all trust “A” and trust “B” assets. All estates of $10.9 million or less should be reviewed to optimize the tax basis step up.
Yes, these stories go on and on and on. If you have a trust, whether it’s an A/B or A/B/C trust, you should have it reviewed every five years by your estate planning attorney – particularly if your estate has changed and/or gained in value.
About Your Columnist
C. Tracy Kayser is a featured columnist for Women Lead, the official blog of Connected Women of Influence, where she covers all things estate planning. Tracy Kayser is an estate planning attorney who assists clients with their estate planning needs, probate and trust administration, conservatorships and litigation. She was an insurance defense litigator for seven years before opening her own law firm, Kayser Pahor, Attorneys, LLP, in Orange County in 2010 in order to better serve her clients and to provide high end service coupled with compassion and excellence.