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"A & B" Trusts

WHOM IS IT FOR?: Generally appropriate for married couples or other couples with assets at or near the estate tax exemption amount (currently $5 million but will go back to $1 million on January 1, 2013 unless Congress and the President act) or with complex family situations (e.g., children from prior relationships).

If a married couple's estate has a value clearly above the estate tax exemption amount, an A/B/C Trust (i.e., "Q-TIP" Trust) or other estate planning instruments may be appropriate. Click Here to view information on A/B/C Trust.

An A and B Trust is similar to a Standard Trust in that it will avoid the time and expense of the probate process if the trust is properly prepared and assets are properly titled (i.e., "vested") in the trust. With an A and B Trust, there are generally one or two additional factors to consider:

1. The primary reason for an A and B Trust is to minimize the chance of an estate tax being due on the death of both husband and wife (or partner #1 and partner #2). With an A and B Trust, it is possible for an estate with a value of up to twice the estate tax exemption amount to pass to beneficiaries free of any estate tax.

   With an A and B trust, on the death of the first spouse/partner #1, assets are divided into two "sub-trusts." The survivor's assets (usually Trust "A") and the decedent's assets (usually Trust "B"). A second set of income tax returns (for Trust "B") are therefore due every year.

   Generally, the surviving spouse/partner #2 is the Trustee (i.e., "manager") of both trusts. The survivor can generally do as they please with Trust "A," including changing the beneficiaries and successor trustees (i.e., managers of the assets). However, although the survivor may be the trustee of the decedent's share (i.e., Trust "B"), and can change how assets in the trust are invested and receive the net income from Trust "B," the survivor is severely limited as to any use of the principal and cannot amend the terms of Trust "B."

   By doing this, upon the survivor's death, only the assets of Trust "A" and other assets of the survivor's are subject to estate tax, if any, but the assets of decedent's (i.e., Trust "B") are not subject to the estate tax.

   After the death of the first spouse/partner #1, beneficiaries are entitled to a copy of Trust "B" and to an annual accounting of the assets in Trust "B" only, if they request it.

2. The other reason for an A and B Trust is to restrict the ability of the survivor to change the beneficiaries of Trust "B." So, to prevent the surviving spouse/partner #2 from leaving the entire estate to a new spouse/partner, his or her own children or another person, Trust "B" irrevocably mandates who the beneficiaries will be.

   This may be important in complex family situations such as when one spouse/partner has children from a previous relationship. With an A and B Trust, a spouse/partner can insure that his or her children from a previous relationship are protected from the surviving spouse/partner #2 excluding them, or, frivolously using-up the Trust "B" assets.

There are many factors to take into consideration before executing an A and B Trust. An experienced California estate planning attorney needs to thoroughly examine your situation and explain the benefits and consequences of creating an A and B Trust as it applies to your particular situation.

The attorneys at The Law Office of John T. Anderson have the expertise necessary to help you decide if an A and B Trust is right for you.

Attorney John T. Anderson is a Certified Specialist in Estate Planning, Trusts, and Probate Law by The State Bar of California Board of Legal Specialization. We are here to advise you and help you understand the type of estate plan that would be beneficial to you.

To view a short video by Long Beach Estate Planning Attorney John T. Anderson on the different types of trusts prepared by The Law Office of John T. Anderson, Click Here.

Contact our office to set up an appointment for an attorney to thoroughly analyze your specific circumstances and discuss with you the type of estate plan you should consider.

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