Do You Have an AB Trust? Simplify it with a Joint Disclaimer Trust

Do You Have an AB Trust? Simplify it with a Joint Disclaimer Trust

Creating and funding your Living Trust doesn’t necessarily stop there. A Trust should be updated with important life events—a birth or death in the family; changes to relationships, including divorce; or acquisition of property or other assets that could affect the inheritance of your loved ones. Occasionally, there are also changes to laws, which is what happened with AB Trusts.

“AB Trusts” used to be very popular, because in the past, the estate tax used to affect significantly more people than it does today. The Economic Growth and Tax Relief Reconciliation Act of 2001 began the process of increasing the threshold for estate taxes.

Before that law, the federal estate tax affected any estate with a net value of $675,000 or more. The rates were upwards of 50% on amounts subject to the tax. Considering the value of California estates, one can imagine that many middle-class people found themselves subject to this tax, which was really only intended for the very wealthy.

To mitigate the effect of the estate tax, many people would create an “AB Trust”. 

What are AB Trusts?

The standard AB Trust usually begins as a shared marital Trust. When the first spouse dies, the Trust is divided into two Trusts: Trust A and Trust B. Trust A receives half of the couple’s community property, and the surviving spouse’s separate property. Trust B receives the other half of the community property, and the separate property of the deceased spouse, but with the surviving spouse named as life beneficiary of the Trust. The surviving spouse can receive all income from Trust B, and may also receive some principal, if Trust A is exhausted.

The downsides to this arrangement are many

  1. Costly Trust administration at the death of the first spouse
  2. The surviving spouse’s lack of control over the terms of Trust B, which is irrevocable
  3. The need to prepare a tax return every year for Trust B for the rest of the surviving spouse’s life. What a headache!

The history of AB Trusts

AB Trusts were quite common when the federal exemption for estate tax was much lower. But now, the federal exemption is $5.45 million per person, $10.9 million per couple, and rising each year. These days, there is little reason for most of our clients to choose the difficulty of splitting the estate at the first death and losing the flexibility of amending the B Trust.

Most of our clients are relieved that the estate tax rules are much simpler now. Ordinary couples can still do an AB Trust if they want to restrict the surviving spouse’s ability to make changes to the Trust after the first death, but they are not required to engage in this very complicated device merely by the size of their estate.

Do you have an AB Trust that you’d like to update to a Joint Disclaimer Trust?

You may have done a Trust in the ‘80s or ‘90s. If so, you may benefit greatly from the simplification of the estate tax rules. Contact us today and we can assist you with a restatement of your Living Trust to get you out from under the burden of the AB Trust which you may no longer need.

Schedule an appointment with California Document Preparers at one of our three Bay Area offices today.