Is it necessary to redo trust?

By Len Tillem and Rosie McNichol

Dear Len & Rosie,

We have a living trust that we created 10 years ago. I believe the trust is called an “A/B Living Trust.” Over the past 10 years, we have kept all assets in the trust. The company that created the trust has called and said that it is a good idea to restate the trust, especially because it is an A/B trust. Of course they want us to pay for it. Is it really necessary to restate the trust given that we haven’t changed our beneficiaries, or our assets.

Christine

Dear Christine,

The way your A/B trust works is that upon the death of the first of you to die, the trust is divided into two, or sometimes three, subtrusts.

The B trust, frequently called the “bypass” or “exemption” or “decedent’s” trust is an irrevocable trust funded with the portion of the deceased spouse’s assets that pass free of federal estate tax. The surviving spouse usually gets all of the income of the B trust, and may dip into the principal of the B trust if the A trust assets and assets outside the trust are insufficient to pay for the surviving spouse’s needs.

The estate tax limit today is $2 million, but it will increase to $3.5 million in 2009. In 2010, there will be no estate tax at all, but in 2011, under current law, the amount of your assets that will pass free of federal estate tax will fall to $1 million.

Most legal commentators believe that President Obama and the new Congress will reform the federal estate tax and set a permanent limit at either $3.5 million or $5 million. If this happens, then you and your husband may not need an A/B trust unless the total value of your assets, including your retirement accounts and insurance, is less than those limits.

To change your trust, it’s easier to amend your trust by replacing the entire trust document with an ordinary trust that does not require an A/B split upon the first death. This is better than making an entirely new trust, because you won’t have to remove your assets from your old trust and put them into a new trust. Most well-drafted ordinary trusts for married couples include an optional disclaimer trust, so that if it turns out that you are too wealthy for estate tax purposes, the surviving spouse may disclaim assets passing from the deceased spouse in order to avoid the estate tax on the second death. Disclaimed trust assets would then be held in the Disclaimer trust, which still provides income to the surviving spouse and the ability to dip into the trust principal if needed.

You may want to keep the A/B trust the way it is if you and your husband want to restrict the ability of the surviving spouse to change things.

This can be very important in blended families with children from prior marriages, because while most spouses want to leave everything to one another, they still want their children to inherit it all in the end.

You should keep an eye on this column for news about the estate tax. We will pass it on to you as it develops.

Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, 996-4505, or www.lentillem.com. Len also answers legal questions each weekday, noon to 12:45 p.m., and Sundays, 4-7 p.m., on KGO Radio 810 AM.

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