Last week, I was talking with a couple at my son’s baseball game, when the wife mentioned that they had set up their revocable living trust up back in 2005. The couple said they were concerned it needed to be updated.
Aside from the major life changes they’d had since then, including having more children, and moving out of state, there was a larger red flag that went up for me when I heard the date of the trust.
Basically, for many years, including 2005, the common structure for trusts for married couples was called the A/B Trust. This meant that upon the death of the first spouse, the trust was divided into two sub-trusts: Trust A for the surviving spouse, and Trust B for the late spouse.
The main reason for this mandatory split structure was to mitigate estate taxes, a likely problem for couples back then because the amount of money the government would allow you to pass at a death without triggering estate tax was significantly less than it is today. Due to changes in law and changes in the tax exemption, the need for the A/B Trust as a tax avoidance strategy became less necessary.
The other problem is that for the assets and real property put in Trust B, the family will not receive a “step-up” in basis for capital gains tax purposes upon the death of the surviving spouse. This means the beneficiaries of a Trust B can be stuck with significant capital gains tax on assets or real property if there was significant appreciation between the death of the first spouse and the death of the surviving spouse.
There are however some benefits of having an A/B Trust, such as asset protection for the late spouse’s assets and real property in Trust B, and a guarantee those assets and real property will only pass upon the surviving spouse’s death to the beneficiaries the couple had chosen together.
New laws and planning techniques such as the Clayton Election Trust, now afford couples many benefits of the A/B Trust without the negative tax consequences, or at least provides them a choice between realizing tax advantages versus asset protection depending on what’s right at the time. Talk to your Newport Beach Family Estate Planning Lawyers about replacing your old A/B trust with a Clayton or Disclaimer trust today. It literally may save you hundreds of thousands of dollars in the long run!
Meier Law Firm is now offering a free trust review of any trust as long as you contact our office by May 1, 2017 to schedule your appointment. Be sure to mention this article to receive the free review. Call (949) 718-0420.