Living trusts are a common estate planning device that can shield a person’s assets from the probate process. For married couples in California holding substantial assets, a more complex form of trust planning is available. Known as survivor and exemption trusts, or sometimes as A/B trusts, these special trusts can reduce the potential impact of federal estate taxes.
As of 2013, the federal estate tax exempts the first $5.25 million of a person’s estate. The law also provides an unlimited marital deduction for assets transferred from a deceased spouse to a surviving spouse. This means that when the first spouse dies, his or her entire estate-including any share of community property-may be transferred to the second spouse and no estate tax will be due, as the first spouse’s estate is considered empty. When the second spouse dies, his or her estate can then claim the $5.25 million exemption, owing federal estate tax on the surplus.
The A/B trust, however, provides a mechanism so that both spouses estates may benefit from the $5.25 million exemption. A couple initially creates a living trust to hold their assets. When the first spouse dies, this trust is then subdivided into a survivor’s trust and an exemption trust. The survivor’s (or “A”) trust represents the surviving spouse’s half of the property initially placed in trust. The surviving spouse can still modify or revoke this trust at any time. The exemption (or “B”) trust contains the deceased spouse’s share. The surviving spouse still has access to assets in the B trust, but title to the property remains with the exemption trust. This allows the exemption trust to claim the $5.25 million exemption for the deceased spouse, while allowing the surviving spouse’s future estate to keep its own exemption, thus effectively doubling the exemption on the couple’s assets to $10.5 million.
Dealing With Trust Complications
A/B trusts may present complications, especially when children are involved. A recent California appeals court decision, discussed here solely for illustrative purposes, demonstrates the type of confusion that may arise. Kenneth and Beverly Woodgrift created an A/B trust in 2000. After Kenneth Woodgrift died in 2010, the trust subdivided into the survivor’s trust, where Beverly Woodgrift remained trustee, and the exemption trust, where Keri Staley, Kenneth Woodgrift’s daughter from a prior marriage, was named special trustee.
Staley’s sole function as special trustee was approve any discretionary distributions of exemption trust principal requested by her stepmother (Beverly Woodgrift was automatically entitled to the income from either trust). Disagreements arose as to the precise extent of Staley’s authority. The court of appeals said the special trustee’s power derived from the precise terms of the original trust instrument, which had to be construed narrowly.
For example, the court rejected Staley’s claim that she had the right to approve the accrual of additional interest on a reverse mortgage applicable to a home owned by both trusts. Staley argued the additional interest reduced the exemption trust’s equity in the property. The court of appeals noted, however, that Beverly Woodgrift accounted for the additional interest against the survivor’s trust’s share of the property (which is under her sole discretion), thus protecting the exemption trust’s principal.
Is an A/B Trust Right for Me?
An A/B trust is not appropriate for every married couple. As with any estate planning matter, you should consult with an experienced San Diego estate planning attorney who can advise you on the current state of the law and how it may affect you and your family. If you have any questions, please contact the Law Office of Scott C. Soady at 1-877-435-7411.