Amending A/B or Bypass Trusts

Information On Amending A/B or Bypass Trusts

Before 2011, A/B Trusts (also known as a “bypass trust” or “credit shelter trust”) were an extremely popular option for wealthy couples seeking to avoid prohibitively expensive estate taxes upon the death of the second spouse.

For example, Henry and his wife Mary have an estate worth 8 million dollars. When Henry dies, he leaves everything to Mary. His estate (4 million dollars) is not taxed, because it goes to Mary. However, when Mary passes away, her estate is now vulnerable to estate taxes. If the amount exempt from estate taxes was 2.5 million, everything above that (5.5 million in Mary’s case) would be subject to a 45% estate tax. Ouch!

An A/B trust helped eliminate that big financial pinch by dividing the first deceased spouse’s estate into two trusts, the “A Trust” and the “B Trust.” The money in the trust would be subject to the estate tax, but since it was lower than the exempt amount, no taxes would be taken.

However, in 2011 a new law made most A/B trusts irrelevant by making the federal tax exemption transferrable between married couples. This means that Henry’s 5 million dollar exemption can be combined with Mary’s 5 million dollar exemption upon her death. As long as their combined estate is worth less than 10 million dollars, no estate taxes will be applied.

This is great news for the vast majority of couples in America. As long as your estate is worth less than 10 million dollars, you will not be affected by the estate tax. It does, however, present a problem for couples who created an A/B trust before the 2011 rule change. The A/B trust setup restricts the ability of the surviving spouse to amend the trust and use the assets in the trust, which is problematic when applying for long-term care benefits available through Medi-Cal. This was an acceptable drawback for most couples when an A/B trust meant that they could potentially save millions in estate taxes. Now, however, those restrictions are unnecessary encumbrances.

Couples with estates under 10 million dollars who have an A/B trust should strongly consider amending the A/B trust. This procedure should be handled by a qualified estate planning attorney. At the Law Office of Justin M. Gilbert, we are able to amend A/B trusts to allow couples to have much more control and freedom of their assets after the death of the first spouse. Contact our law office at (916) 467-4999 to schedule a consultation now.


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