Revocable Trusts for Married Couples
Carissa Giebel 12:02 p.m. CDT May 25, 2015
When a married couple sets up a revocable living trust, there are various ways to have it structured.
For many years, trusts were often structured as AB trusts. However, many surviving spouses are not thrilled about administering one of these trusts and consider it an unnecessary hassle since many people are no longer affected by estate taxes. With the estate tax exemption as low as $675,000 in 2001, many trusts were structured as AB trusts, and now people are frequently choosing to update to disclaimer trusts to provide more flexibility and reduce the likelihood of an administrative hassle upon the first spouse's death.
With an AB trust, upon the first death, the deceased spouse's half interest in the trust property goes into the B trust, up to the estate tax exemption amount ($5.43 million in 2015). This trust, with its own tax identification number, is irrevocable and cannot be changed. It's often structured to be available for the health, education, maintenance, and support of the surviving spouse. The surviving spouse's half interest is in the A trust, which can be revoked or amended by the surviving spouse at any time.
Alternatively, the disclaimer trust gives the surviving spouse the option to create the B trust. This B trust is created only if the surviving spouse makes a disclaimer within nine months after the first spouse's death. All assets not disclaimed would remain in trust for the benefit of the surviving spouse (A trust). The primary reason the surviving spouse might want to make a disclaimer and establish the B trust would be if the couple's assets exceed the estate tax exemption.
For example, with a $5.43 million dollar exemption, that means that both the husband and the wife can each pass $5.43 million free of estate taxes, up to a total of $10.86 million. If the couple has an estate of $10 million, the husband passes first leaving all his assets to the wife, and no further action is done by her, the wife can only pass $5.43 million free of estate tax upon her death (or whatever the exemption amount is at that time), and the remaining $4.57 million would be taxable at 40 percent (or whatever the rate is at that time). However, if she would disclaim $4.57 million of husband's interest into a B trust, the full $10 million will pass free of estate tax. Again, any disclaimed amount to the B trust is often structured to be available for the health, education, maintenance, and support of the surviving spouse.
Fewer people are concerned about estate taxes now since the exemption is so high. If a couple with an AB trust has a $2 million estate, $1 million must be funded to the B trust upon the first to die, which might be an unnecessary administrative burden. Since the couple does not have any estate tax concerns, a disclaimer trust might be best for them so the B trust is only created if their net worth increases substantially or the estate tax exemption goes down significantly. The disclaimer trust gives the surviving spouse the flexibility to choose whether or not a B trust is necessary, depending on their net worth and the estate tax exemption when the first spouse passes.
There might be other factors to consider in determining which trust to use. In a second marriage situation, a B trust might be desired, even if estate taxes are not a concern. It's important to discuss your goals with an estate planning lawyer. If you have a joint trust with your spouse, and are unsure how it is structured, it might be wise to get it reviewed to see if a disclaimer trust would be best for you.