Estate Tax Law Changes Make it Time to Amend Dated AB Trust

Many of our clients are coming in to simplify their old AB Trusts. The AB Trust was originally designed to create estate tax savings by keeping the deceased spouse’s property out of the estate of the surviving spouse. In 2011, however, a dramatic change in the federal estate tax laws exempted most estates from paying any estate taxes. For 2017, for example, the exemption is $5.49 million, which quickly eliminates the vast majority of Americans.

How the AB Trust works

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.

Results of the estate tax laws changes

The results of the estate tax law changes mean that an estimated 1% of the US population now pays any estate tax at all. This makes the old AB Trusts dated and cumbersome for the vast majority of Americans.

Limitations of the AB Trust

• Restrictions on what the surviving spouse can do with AB Trust property can make it difficult to sell assts.
• The surviving spouse cannot make gifts of the AB Trust’s property to anyone.
• There can be substantial costs involved in managing the AB Trust after the death of the first spouse—preparing taxes and ensuring that this property is kept separate from that of the surviving spouse.

The reality is that the AB Trust is no longer necessary or advisable for estate planning. We are helping many of our clients amend or restate their Trusts to remove the AB Trust provisions.

Do you and your spouse have an AB Trust that you’d like to amend? Call California Document Preparers at one of our three Bay Area offices today to schedule an appointment. We’re helpful, compassionate and affordable.