Paul Kellogg – Attorney at Law

The most critical reason why people should hire experienced trusts and estates lawyers for their estate planning is that it’s the only way you can make sure that you understand what you’re getting or what you already have. The estate tax laws, and estate planning in general, have changed quite a bit since I started practicing in 1993, which can seriously impact how your old trust works. From my experience, many individuals who established an A/B trust to plan for the federal estate tax in the 1990’s don’t fully understand how that trust will work with today’s estate tax levels.

An A/B trust is designed to help reduce or eliminate the amount of federal estate tax due upon the death of the surviving spouse. The way it works is that when one spouse dies, the surviving spouse does not inherit everything outright, instead, the trust is divided into two separate shares. The deceased spouse’s assets, up to the estate tax limit in the year of the first death (which was $600,000 in 1993) is held in the B trust, which can be referred to under many different names, such as “Bypass Trust” and “Credit Shelter Trust.” If the deceased spouse has assets in excess of the current estate tax exemption, the excess goes to the A trust for the surviving spouse, where the surviving spouse usually has full and unrestricted access.

After the split is completed, the survivor really owns only the A trust. The B trust is completely irrevocable. The surviving spouse is usually in charge of both trusts and gets all the income earned from both the A and B trusts but cannot change who inherits the B trust when he or she dies. The tax benefit to an A/B trust comes after the surviving spouse’s death when the B trust will pass free to your chosen beneficiaries free of any estate tax liability.

But that was 1993 when the estate tax exemption was only $600,000. In 2018, the federal estate tax exemption is $11.2 million. Furthermore, if the surviving spouse of a married couple is a United States citizen, he or she can take the deceased spouse’s exemption as well, protecting up to $22.4 million from the estate tax.

What this means to you is that you probably no longer need an A/B trust unless you either want to prevent the surviving spouse from being in control of everything, or your estate has a value close to $22.4 million. If neither of those scenarios apply, you should consider restating your trust (amending it in full) so that when one of you passes the survivor will own everything and won’t be answerable to the children or other named beneficiaries.

Updating your old A/B trust will make it much less expensive to administer after the first death, as the survivor won’t have to split the trust and won’t need to file an annual income tax return for the B trust. Updating your trust now will make it a lot easier to handle in the long run.

Paul Kellogg is an attorney in Cincinnati with the Phillips Law Firm, Inc. Paul’s practice focuses on providing comprehensive estate planning and probate services to families and business owners, as well as serving as outside general counsel to entrepreneurs and businesses where he provides guidance and advice on a wide variety of transactions and disputes.  He can be reached at (513) 985-2500 or via email at [email protected].   Please explore Paul’s other articles on estate planning and business on the Phillips Law Firm Blog page