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The Dangers of the “Typical” Revocable Living Trust for Married Couples, and Why It May Not Be the B
By Michelle Beneski, Esq.
If you are married and have an estate plan, you probably have a typical “A/B” revocable living trust. These trusts were designed to take advantage of the relatively small federal estate tax exemptions available at that time, by assuring that the estate tax exemption of the first spouse to die would not be wasted. This is done by requiring that the surviving spouse divide the couples’ property, and put the property that was owned by the deceased spouse into a new, irrevocable (i.e. unchangeable) trust for the benefit of the surviving spouse and the children. This new trust is the “B Trust,” which may be called other things in your estate plan such as the Family Trust, Exemption Trust, Bypass Trust, or some other language. Sound familiar?
Unfortunately, because of major changes in the federal estate tax laws in 2001, the “typical” A/B trust may no longer be appropriate or even necessary for couples. This is because the federal estate tax exemption amounts have been rising over the past several years. As a result, one tax exemption may be more than sufficient to cover the value of a couples’ entire estate, often reducing or even eliminating the need to divide the property at the first death.
It gets worse. The current federal estate tax exemption is $2,000,000, and will stay that way for 2007 and 2008. In 2009, the exemption will go up to $3,500,000, and in 2010, the federal estate tax will be eliminated for the entire year! Unfortunately, on January 1, 2011, the federal estate tax will return with a vengeance, and the tax exemption will be reduced back to only $1,000,000.
Additionally, Massachusetts has it’s own estate tax that is imposed on estates over $1,000,000. Older Trust plans do not account for this change and may actually cause Massachusetts estate tax to be due on the death of the first spouse. The Massachusetts tax on a million dollar estate is over $30,000. In a lot of cases this tax can be eliminated with proper planning.
Congress can change these laws at any time, provided they feel that there is a need to do so. Unfortunately, we can’t predict the following: 1) what the federal estate tax exemption will be when you and your spouse die; 2) when you and your spouse will die; and 3) what you own and how much you will be worth when you die. The A/B living trust could turn out to be a very good choice or a very bad choice, depending solely on when you die and what you are worth on that date! In other words, sometimes you might want to use some or all of the tax exemption of the first spouse, and sometimes you might want to have everything go to the surviving spouse.
Because of this, revocable living trusts should permit a high degree of flexibility for the surviving spouse or someone else (called a “Trust Protector”) to decide whether or not to use the federal tax exemption of the first spouse to die. Such trusts can be customized for your particular situation, and can provide as much flexibility as you wish. If you have a typical “A/B” trust, it’s time to have it reviewed.
If you are interested in learning more or if you would like to have your “A/B” trust reviewed, call our office for a FREE one hour consultation. We will review your situation and make recommendations for protecting your family. Each individual’s situation is different. Never assume it’s too late or that nothing can be done to protect your assets. Call for your FREE consultation. We can be reached at 1-508-994-5200.
Michelle Beneski, Esq.
Michelle D. Beneski, Esq. is a partner in the Surprenant & Beneski, P.C. located in New Bedford, Massachusetts. The firm concentrates on Elder Law and Estate Planning Issues.
She is a frequent speaker and author on estate planning topics.
Michelle is a graduate of Pepperdine University School of Law, Cum Laude and holds L.L.M. in Taxation from the University of Florida, College of Law. She is a member of the National Academy of Elder Law Attorneys, Wealth Counsel and the Bristol County Estate Planning Council.
We meet with our clients for Free every three years to ensure the documents still work for them. Surprenant & Beneski, P.C. charges $500 for an initial estate planning consultation. However, this consultation fee will be waived if you reference this article.
If you would like more information on Medicaid planning, call for our Free Consumers Guide to Medicaid Planning or our free report 25 Ways You Can Mess Up Your Estate Plan or to make an appointment for a consultation, call our toll free number (800)929-0491 for a recorded message or call our office at 508-994-5200.
Feel free to contact Michelle at 508-994-5200 or visit www.myfamilyestateplanning.com
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