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Estate Planning Tax Law Changes: Changing Traditional Trust

Estate planning tax law changes allowing people to create simple trusts as opposed to AB Trusts to tax avoidance purposes

Traditional “AB” Trusts – A thing of the Past…

The American Taxpayer Relief Act (ATRA) was signed into law on January 2, 2013. The enactment of the ATRA has been one of the most influential  estate planning tax law changes in recent history. The influence of these estate planning tax law changes has allowed couples that simply want to leave everything to each other and then their kids to create straightforward estate plans. The historically unstable, fluctuating and uncertain future of estate tax caused married couples to create “AB Trusts” as a tax strategy. The problem? Creating an “AB” Trust puts an unnecessary burden on the surviving spouse simply to avoid or minimize estate taxes by taking advantage of both spouse’s estate tax exemptions.

The ATRA and corresponding estate planning tax law changes has made the use of AB Trusts a thing of the past. Why? Under the provisions of the new law, “portability” of the estate tax exemption between married couples has been made permanent for 2013 and future years. What does this mean? The new estate planning tax law changes allows a single person to pass up to $5.34 million and a married couple to pass up to $10.68 million to their loved ones estate tax free – making AB Trusts obsolete or unnecessary from a financial tax perspective. Creating an AB or Disclaimer Trust will not supply you with any additional exemption under the new estate planning tax law changes. This doesn’t mean that the estate planning tax law changes has lead to the extinction of AB Trusts.  There are 3 main reasons why creating an AB Trust is a viable approach for some people.  Still, with the implementation of “portability,” there is no reason (from a tax standpoint), to keep an AB Trust and every reason to change it so the plan and administration is flexible, simple and straightforward for the surviving spouse.

Estate Planning Tax Law Changes Reduces Problems with AB Trust on Surviving Spouse

Estate planning tax law changes causing people to re-think their old traditional plansLimitation on Irrevocable “B” Trust Assets

Regardless of intent or desire, a surviving spouse cannot change irrevocable “B” Trusts. This is the case even if the named beneficiary is no longer the desired beneficiary of the surviving spouse. Additionally the surviving spouse’s use of assets in the B Trust must be limited to an ascertainable standard.  While creating AB Trusts in the 80’s, 90’s and beyond was the default practice for most law firms, the new estate planning tax law changes has decreased the need and positive reasons to create complex AB Trusts for many people given the restrictions and limitations of the use of “B” Trust assets by the surviving spouse.

Render Accounting & Maintain Records

As the successor trustee, the surviving spouse is responsible to future beneficiaries of the B Trust for appropriately using the assets.  The surviving spouse must render accounting, as well as provide a copy of the trust to the heirs and future beneficiaries. In addition to accounting, the surviving spouse must maintain the “B” Trust by properly allocating assets, changing title of assets, and obtaining taxpayer ID numbers for the same. This is a lifetime job as the surviving spouse must continue to accurately track and keep records of the assets and transactions of both the “A” and “B” trust for the remainder of their lifetime.

Does “Portability” Under the new Estate Planning Tax Law Changes Impact Anything?

The existence of higher exemptions (and use of portability) does not and will not relieve the surviving spouse from the AB trust requirements. Using the AB Trust format causes the surviving spouse to live with the above responsibilities. How can you make things easier? Change your AB Trust to a more straightforward document, thereby relieving the surviving spouse from the burdens of keeping the unneeded AB Trust.


About Sean Hanley

Practicing law since 2007, Sean specializes in the ever-changing laws related to real estate, business and estate planning. Embracing technology with a focus on personalized service, he understands the challenges of living and thriving in Silicon Valley. Tapping into his education in economics and business administration, Sean also serves on the non-profit Willow Glen Business Association.

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