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2013 Estate Planning Laws: Have A/B Trusts Tumbled Off Fiscal Cliff?

2013 estate planning laws no longer require people to divide money into A/B Trusts to minimize estate taxes

A/B Trusts a Thing of Past for Most

Prior to the Fiscal Cliff legislation (passed on New Years Day 2013), an A/B Trust was a common estate planning tool used by married couples to minimize estate taxes. The Fiscal Cliff legislation impacts 2013 estate planning laws by making the federal estate tax exemption transferable (or “portable”) between married couples. It also increased the individual exemption amount to $5,250,000. The result. A/B Trusts may be a thing of the past. Why? Married couples can now transfer up to $10,500,000 to the younger generation without having to pay an estate or inheritance tax. The new 2013 estate planning laws accomplish this goal without the need of sophisticated estate planning packages that strategically minimize tax impacts through use of specialized trusts, such as an A/B, QTIP, Bypass, Credit Shelter, or Family Trust. Remember. You still need a trust to avoid probate. Avoiding probate is unrelated to the federal tax exemption under the old law or the new 2013 estate planning laws. Simply stated. Having a complex plan that utilizes an A/B Trust to avoid an inheritance tax is no longer necessary for most people under the new Fiscal Cliff legislation impacting 2013 estate planning laws.

The “portability” of the estate tax exemption has not eliminated the need for A/B Trusts in all situations. There are 3 scenarios where an A/B Trust should still be considered under the new 2013 estate planning laws.

3 Reasons to Keep A/B Trust Package under 2013 Estate Planning Laws

2013 estate planning laws impact the need for A/B Trusts Second Marriage with Kids from Previous Marriage

A/B Trust planning may still be a good idea in the case of a second or later marriage where each spouse has their own children from a previous marriage. Creating an A/B Trust under the 2013 estate planning laws brings certainty to the couple that their own children will inherit their separate assets after their death.

Surviving Spouse Creditor Protection

The first step to creating an A/B Trust under the old or new 2013 estate planning laws is to divide the assets of the couple so that each spouse has about the same value of assets in their name or the name of their revocable living trust. The first spouse to die will fund Trust B up to the estate tax exemption amount ($5,250,000). Trust B is used by the surviving spouse or other named beneficiaries.  If the deceased spouse’s assets exceed the exemption amount, the excess is funded into Trust A. Result. No taxes paid by surviving spouse until death. There is an added benefit of splitting the couple’s assets this way. Since Trust B is set-up with the decedent’s share of the estate, the surviving spouse has a certain amount of creditor protection from the survivor’s future creditors.

There are limits, other specialized considerations, and practical enforcement issues concerning A/B Trust packages. They not only cost more to create (more work is involved), but they cost more to administer on death.

This begs the question – Should you change or create a new trust based on the new 2013 estate planning laws? Probably. A/B Trusts are confusing and difficult to administer. Simply put. The new 2013 estate planning laws simply make A/B Trust packages a thing of the past for most people.

Some States Collect Estate Taxes

It is wise to use an A/B trust in states that collect estate taxes. California is not one of those states.

If you created an A/B Trust before the inception of the new 2013 estate planning laws to save estate taxes and none of the above 3 reasons apply to you, it is wise to change to a more straightforward trust package. This way, your wishes will be carried out in an easy straightforward manner with minimal costs to your estate.

About Dan Hanley

Specializing in estate planning, elder law and real estate law, Dan brings a wealth of experience and knowledge to help his clients with a variety of legal needs. In addition to a MBA and Juris Doctorate from Santa Clara University, Dan is also a licensed real estate broker since 1980.

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