San Diego Estate Planning Lawyer Blog
Survivor’s and exemption trusts-often called “A/B trusts”–are a common estate planning device used by married couples to help reduce federal estate tax liability. The A (survivor’s) trust represents the property under the exclusive control of the surviving spouse after the first spouse dies. The surviving spouse may amend or revoke the A trust like any other living trust. The B (exemption) trust represent the deceased spouse’s share and becomes irrevocable upon his or her death. The surviving spouse may continue to enjoy and benefit from property in the B trust, but the legal title remains with the trust, restricting the survivor’s ability to modify the trust’s principal.
The B trust must comply with the stated wishes of the deceased spouse. That is why the trust becomes irrevocable upon death. Recently a California appeals court weighed in on a case where the surviving spouse attempted to use the principal of a B trust to circumvent her late husband’s wishes. The case is discussed here for illustrative purposes only.
Protecting the Principal
Riley and Eva Maria Douglas established a living trust in 1992 that provided for an A/B trust upon the death of the first spouse. Riley Douglas died in 2002. The now-irrevocable B trust included the Douglas residence in Manhattan Beach. The trust documents expressly stated that Eva Maria Douglas could not, as sole trustee, “invade the principal” of the B trust. Upon her death, any assets in the B trust would be equally divided among the Douglases four children.
After her husband’s death, Eva Maria Douglas began to favor one child, Derek Douglas, over the others. She amended her A trust to leave a commercial property in Paramount solely to Derek. She also took out a number of loans, using the Manhattan beach residence as collateral, which were primarily for the benefit of the Paramount property and Derek Douglas. By the time she died in 2009, Eva Maria Douglas had encumbered her residence with approximately $875,000 in loans.
Derek Douglas’ three siblings filed legal action to remove their brother as successor trustee. They also demanded Derek repay the trust for benefits resulting from what they considered his “undue influence” over their mother. In 2011, a probate judge ordered Derek Douglas to repay the B trust a total of $450,000 plus interest. (The court of appeals later affirmed this decision, aside from modifying the probate court’s calculation of additional interest owed.)
The crux of the issue, the appeals court explained, was that once the B trust became irrevocable, Eva Maria Douglas “had no power to obtain loans against the residence,” as that reduced equity in the property that had to be preserved for the benefit of all four children. For instance, Eva Maria Douglas took out a $250,000 home equity line of credit and used the proceeds to finance Derek Douglas’ day trading activities. This clearly violated the terms of the B trust.
Keeping Watch Over Your Trusts
When creating a trust, you can’t just sign some papers and forget about it until it’s too late. It’s important that you and your successor agents understand the legal obligations imposed by a trust. You should always work with an experienced San Diego estate planning attorney in creating, modifying or administering any trust. Contact the Law Office of Scott C. Soady today if you have any questions.