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Typically, a married couple will set up either a simple revocable living trust or an "AB trust" as part of a comprehensive estate plan.
An AB trust is a joint trust set up by a husband and wife that controls how their property is distributed after each of their deaths. The primary purpose of an AB trust is to avoid estate tax when the first spouse dies. When the first spouse dies, the trust transforms into two trusts: an irrevocable living trust in the name of the deceased spouse and a revocable living trust in the name of the survivor. This structure would allow the married couple to combine their federal estate tax exemptions, particularly at a time when the tax exemptions were very low, thereby subjecting many to estate or "death" taxes.
Though very popular years ago, AB trusts now have a more limited purpose because the 2018 federal estate tax exemption is a very high $11.2 million per person and $22.4 million per couple. Therefore, a married couple can pass up to $22.4 million tax-free – no AB or other tax exemption sub-trust is necessary.
Also, thanks to recent “portability” laws allowing the transfer of tax exemptions between spouses, the surviving spouse is now allowed the straightforward use of both (husband’s and wife’s) exemptions without the need for any special sub-trust planning. With portability, spouses can leave their estates outright to each other. Accordingly, more couples today opt for a simple revocable living trust.
Furthermore, an AB trust puts significant burdens on the surviving spouse, including:
1) The B trust becomes irrevocable and non-amendable upon the first spouse’s death (the surviving spouse cannot alter those trusts, or add, change, or remove beneficiaries or gifts from those trusts),
2) The surviving spouse’s use of the assets in the B trust must be limited to an ascertainable standard,
3) As the successor trustee the surviving spouse is responsible and answerable to the future “inheritors” of the B trust for appropriately using the assets and must render accountings as well as provide a copy of the trust to the heirs and future beneficiaries,
4) The surviving spouse must properly allocate, title assets in, obtain tax ID numbers for, and maintain the B trust after the first spouse’s death,
5) During the surviving spouse’s entire remaining lifetime they must continue to accurately track and keep records of the assets and transactions of each trust and complete separate tax filings for the A & B trusts each year, and
6) An AB trust gives the children legal standing to demand accountings and justification for the expenditures and management of the trust assets. Since our court system generally lets everything play out, the surviving spouse is forced to respond, make court appearances and spend thousands or tens of thousands of dollars in legal fees.
If you are highly concerned with what the surviving spouse does with the deceased spouse’s share, an AB trust can be useful to preserve testamentary intent such as leaving certain trust property to your children. When thinking about such a strategy, you have to ask yourself just how worried you are that the surviving spouse will change the terms of the trust.
Ultimately, preserving your testamentary intent comes with an assortment of complications. As discussed above, an AB trust requires you to impose conditions, responsibilities, inflexibility, bookwork, accountings, tax filings, accountability and liability to others, reporting requirements, and other hassles on the surviving spouse for life. Once this is clearly understood, it in fact gives major pause for many to force these burdensome conditions on their spouse.
In sum, the best type of trust for a married couple will depend on your estate planning goals and needs. Discuss your situation with an attorney to help decide what's best for you.
Feel free to give me a call at 415.235.9162 or email me at joe@joebartonlaw.com if you have any questions about this or any other estate planning issues.