Question: My husband and I are looking to create a revocable living trust. We have acquired a fair amount of property, but we aren’t incredibly wealthy by today’s standards. If either of us passes away first, we would like to leave the property to the other. But I would like some assurance that the property, after the death of the last of us, will finally go to our kids. I have heard nightmare stories about the “new spouse,” who finds a grieving husband and is interested in more than just companionship. My husband and I are both determined that the property should go to our kids. What is the best way to be assured that our kids will get their inheritance after one of us is gone?
Answer: The most that you can accomplish is to ensure that your half of the property goes to the children. You can never deprive your spouse of his right to leave his share of the property to whomever he chooses. If you are the first spouse to die, your half of the property can be protected with an “A-B Trust.” But before you make any decisions, you and your husband will want to carefully consider your choice with an estate planning attorney. There are advantages and disadvantages in whatever choice of estate plan you make.
For years, estate planners used the A-B Trust for married couples as a way to avoid, reduce, or delay the payment of any estate tax. When the estate tax exemption amounts were small, these A-B Trusts were necessary and thus quite popular. But as the estate tax exemption limits have increased, now at $11.2 million per person, the estate tax is not such a concern for most, and the use of these trusts has declined.
Most married couples have a simple “Survivor’s Trust” in which the surviving spouse takes the property as his or her own. Upon the surviving spouse’s death, the property goes to the beneficiaries, usually their children. In the period in between the death of one spouse and the other, the trust property is in the full control of the surviving spouse. Indeed, there is a risk that the surviving spouse could write the children out and distribute the funds to someone else, like a masseuse or a personal trainer. But the real question is how much of a risk is there? They are his children, too. Will he really cut them out so easily after you are gone?
If you believe there is such a risk, or if you have to be absolutely assured of funds being held for the kids, then an A-B Trust may be appropriate. It works like this. At the death of the first spouse, the trust divides into two sub-trusts, an “A Trust” and a “B Trust.” The A Trust, for the “above ground” spouse, consists of the surviving spouse’s separate property (property acquired prior to marriage or by gift or inheritance) and the surviving spouse’s one-half share of community property. Again, the A Trust, also known as the “Survivor’s Trust” is the surviving spouse’s property to do with as he or she pleases. The B Trust, for the “below ground” spouse, also known as the “Bypass Trust” or “Exemption Trust,” consists of the decedent spouse’s property. Once created, the B Trust is irrevocable and cannot be amended. It usually is drafted to provide income to the surviving spouse for the remainder of his or her life, but the overall goal is that the principal of the trust is preserved and passes to the beneficiaries after the death of the surviving spouse.
While the A-B Trust comes with a form and structure that offers certain benefits of securing inheritance, it comes with an administrative burden to the surviving spouse. The trust division will require the assistance of lawyers and accountants, and the B Trust requires good bookkeeping as well as the filing of its own annual tax return. Your husband will have to do that if you predecease him. In the event that your husband predeceases you, you will have to do the same.
Depending on how much money you or your husband may have, it’s also possible to directly distribute property to your kids upon the first spouse’s death. Of course, you will want to make sure that whatever happens, the surviving spouse has enough funds for his or her care.
There are some tax issues that arise when it comes to creating these trusts. Namely, while estate tax may not be such a concern in our current environment, capital gains taxes can be a real issue. The tax basis for the B Trust is set at the date of the first spouse’s death, potentially causing capital gains tax at the death of the second spouse. This tax impact can be avoided with a special type of B Trust, called a QTIP. Even the acronyms in this area of law are confusing, so it is best to seek the professional help of an estate planning lawyer, who can advise you of the consequences of any plan.
The best way to transfer your property to your kids is to have an estate plan in place. Don’t let the fear of making the “best” decision get in the way of simply making a good decision.
Preston Morgan is a partner at Kopper, Morgan & Dietrich, a Davis law firm providing family law, estate planning and trust litigation representation. His column is published every other week in the Davis Enterprise. To pose a question to Preston Morgan, contact him at https://kopperlaw.com.
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