In the world of estate planning, many people have heard the term “A-B Trust”. The concept, however, can be misleading and difficult to understand. This article is an attempt to bring it down from the clouds. To start, consider the following example.
Meet Bill and Carolyn, a couple in their late 60s who have been happily married for 22 years. This is the second marriage for both, and they each have two grown children from their first marriage. They have no children together. Now, in their senior years, Bill and Carolyn realize it is time to get their estate plan done.
Bill and Carolyn’s assets consist of the house they bought together, their separate retirement plans and their joint bank account. They have decided that if one of them were to pass away, they want their portion of the estate to be available for the use of the surviving spouse but, if anything is left at the death of the surviving spouse, they each want a portion to go to their own children (as opposed to everything going to the children of the surviving spouse). If they don’t want to do separate trusts, another way to accomplish this goal is to establish a joint living trust with A-B trust provisions, better known as the “A-B Trust”.
There are three distinct time periods in the “life” of a married couple: (1) the initial period when both spouses are alive; (2) the middle period when one of the spouses passes away; and (3) the final period when the second spouse passes away. The A-B Trust must be created during the first period; however, it will not become “active” until the second period. The steps to activate it at the death of the first spouse to die are as follows: first, there is an inventory of all the trust assets. The joint trust is then split in two (sometimes merely a paper record) with half of the community property and all the surviving spouse’s separate property, if any, designated as belonging to the surviving spouse (the “A” trust) and the remaining half of the community property and all of the deceased spouse’s separate property, if any, designated as belonging to the deceased spouse (the “B” trust). The terms of the B trust cannot be changed or revoked by anyone, including the surviving spouse.
Most A-B trusts are written so that during the surviving spouse’s lifetime the surviving spouse can have full use of all the assets of the entire trust, both A and B portions. However, some trusts provide that the surviving spouse can “dip” into the principal of the B trust only after he or she has exhausted his or her own half of the trust. When the surviving spouse dies (the third period of marriage), the assets left in the A trust go to the surviving spouse’s beneficiaries and the assets left in the B trust go to the deceased spouse’s beneficiaries.
A-B trusts are also important for minimizing estate (inheritance) taxes for large estates; but this is an even more complicated subject that will be addressed in a separate article. Meanwhile, if you are creating an estate plan and your family pattern is like that of Carolyn and Bill, consider an A-B trust.
© 2021 by Marlene S. Cooper. All rights reserved.
(You may obtain further information at the website www.marlenecooperlaw.com, by e-mail at MarleneCooperLaw@gmail.com, by phone at (626) 791-7530 or toll free at (866) 702-7600. The information in this article is of a general nature and not intended as legal advice. Seek the advice of an attorney before acting or relying upon any information in this article).