What the new tax law means for A/B Trusts

Dear Readers:

Yesterday, as we write this, the United States Congress passed a new tax law that includes a significant change in the Federal Gift & Estate Tax. In 2017 each person was able to pass on, through lifetime gifting or by inheritance, up to $5,490,000. Yesterday, that amount doubled.

Under the new tax bill, passed by Congress and likely to be signed into law at the start of the new year, the Federal Gift & Estate Tax Unified Credit for 2018 will increase to allow the transfer of up to $11,200,000 without the imposition of either gift tax or estate tax. On top of that, the 2013 tax law allowing for the transfer of a deceased spouse’s Unified Credit to the surviving spouse remains. This means that a married couple will now be able to pass on $22,400,000 to their children and other loved ones.

This won’t mean much to most people. What it does mean is that in almost all cases, married couples with A/B trusts created in the 1990's and 2000's will probably want to change them so that the surviving spouse will no longer have to divide the trust upon the first death, with the deceased spouse’s portion of the trust (up to $11,200,000) being transferred into an irrevocable trust with its own taxpayer ID number (EIN), and its own annual tax returns.

Updating a trust to remove it’s A/B split provisions will make it much easier to administer upon the death of the first spouse to die. Without an A/B split, the surviving spouse will be in unquestionable control of the family’s assets. If, however, a trust is divided in an A/B split, the “B” trust will have designated beneficiaries who will have rights upon the first death even if they do not inherit upon the second death.

At this point, there is only one reason to have an A/B trust - blended families with children from prior relationships. In many modern families, the risk exists that a surviving spouse will act to disinherit the children or other chosen beneficiaries of the deceased spouse. If you fear that happening, then an A/B trust may be appropriate for you. If that is not a concern to you, you will be better off amending your trust so that upon the first death, everything passes to the surviving spouse.

One important point - if upon the first death, the surviving spouse wants to transfer the deceased spouse’s Unified Credit to himself or herself, it is necessary to file and prepare a Federal Estate Tax Return (IRS Form 706) for the deceased spouse.  The deadline for this is nine months after the date of death, with an automatic extension of six months if applied for. While in some circumstances it may be possible to file a 706 late, but that’s not anything you’d ever want to rely on - the stakes are too high.

Our recommendation to you is that in the new year, you should make a resolution to review and update your estate plan, or create one if you don’t have one already. Many people, single persons and married couples alike, have trusts and wills created decades ago that they do not fully understand. It’s a very good idea to at least review everything and know what your estate plan means instead of assuming that you do.