What the new tax law means for A/B Trusts

Dear Readers:

Yesterday, as we write this, the United States Congress passed a new tax law that includes a significant change in the Federal Gift & Estate Tax. In 2017 each person was able to pass on, through lifetime gifting or by inheritance, up to $5,490,000. Yesterday, that amount doubled.

Under the new tax bill, passed by Congress and likely to be signed into law at the start of the new year, the Federal Gift & Estate Tax Unified Credit for 2018 will increase to allow the transfer of up to $11,200,000 without the imposition of either gift tax or estate tax. On top of that, the 2013 tax law allowing for the transfer of a deceased spouse’s Unified Credit to the surviving spouse remains. This means that a married couple will now be able to pass on $22,400,000 to their children and other loved ones.

This won’t mean much to most people. What it does mean is that in almost all cases, married couples with A/B trusts created in the 1990's and 2000's will probably want to change them so that the surviving spouse will no longer have to divide the trust upon the first death, with the deceased spouse’s portion of the trust (up to $11,200,000) being transferred into an irrevocable trust with its own taxpayer ID number (EIN), and its own annual tax returns.

Updating a trust to remove it’s A/B split provisions will make it much easier to administer upon the death of the first spouse to die. Without an A/B split, the surviving spouse will be in unquestionable control of the family’s assets. If, however, a trust is divided in an A/B split, the “B” trust will have designated beneficiaries who will have rights upon the first death even if they do not inherit upon the second death.

At this point, there is only one reason to have an A/B trust - blended families with children from prior relationships. In many modern families, the risk exists that a surviving spouse will act to disinherit the children or other chosen beneficiaries of the deceased spouse. If you fear that happening, then an A/B trust may be appropriate for you. If that is not a concern to you, you will be better off amending your trust so that upon the first death, everything passes to the surviving spouse.

One important point - if upon the first death, the surviving spouse wants to transfer the deceased spouse’s Unified Credit to himself or herself, it is necessary to file and prepare a Federal Estate Tax Return (IRS Form 706) for the deceased spouse.  The deadline for this is nine months after the date of death, with an automatic extension of six months if applied for. While in some circumstances it may be possible to file a 706 late, but that’s not anything you’d ever want to rely on - the stakes are too high.

Our recommendation to you is that in the new year, you should make a resolution to review and update your estate plan, or create one if you don’t have one already. Many people, single persons and married couples alike, have trusts and wills created decades ago that they do not fully understand. It’s a very good idea to at least review everything and know what your estate plan means instead of assuming that you do.

Trustee owes you and the other beneficiaries an impartial duty of loyalty and competence.

Dear Len & Rosie,

Both of my parents are now deceased, the most recent being my step-dad. Are the four of us adult children legally due to receive a financial statement of how funds were spent during my dads illness? Are we entitled to a copy of the trust at no charge, along with the financial statement? The lawyer hired by the trustee is charging $1,000 for a copy of the trust, if we want it, and it has been stated that no one will receive a financial statement until after all funds are dispersed at the end of a waiting period. We were told the waiting period was 120 days but are now hearing it could be six months.

Bill

Dear Bill,

The trustee is legally obligated to provide you a copy of the entire terms of the trust, at no cost, if you request one. The trustee was also supposed to provide you a notice pursuant to California Probate Code section 16061.7 within 60 days of your stepfather’s death telling you this. Having said that, we find it hard to believe that any lawyer would tell anyone that it’ll cost you $1,000 for a copy of the trust document. In any event, legal fees of the trust are paid off the top by the trustee before the trust is divided and distributed to the beneficiaries. It shouldn’t come out of your share.

This sounds more like you have an arrogant trustee who thinks that he or she is actually in charge and gets to make all the rules. Instead, the trustee is a fiduciary in charge of other people’s money. The trustee owes you and the other beneficiaries an impartial duty of loyalty and competence.

The trustee is also required to provide an accounting to all of the beneficiaries presently entitled to distributions of trust income or principal. And by “accounting” we don’t mean a simple financial statement. We mean a formal accounting following the rules of the court which is really an exercise in double-entry bookkeeping that mere mortals don’t know how to do themselves. This accounting runs from the date-of-death to the distribution of the trust assets. Normally you are not entitled to an accounting for the period prior to your stepfather’s death, but if you suspect the trustee is up to no good, you can petition the court to compel an accounting for the entire time the trustee was in charge.

The 120-day waiting period is mentioned in that notice you were supposed to have received. Once the notice is mailed out, a 120-day countdown begins. When it ends, you will lose your right to contest the trust. By “contest the trust” we mean filing a court petition asking the court to declare that the trust document is void. You will still be able to enforce your rights as a trust beneficiary, including the right to compel the trustee to provide you with an accounting if one isn’t forthcoming.

Once this countdown ends and the home is sold, if there is one to be sold, there is usually nothing to prevent the trustee from distributing most of the trust assets, retaining enough to file trust income tax returns next year and to cover any potential creditor claims against the trust, as creditors have a year from the date-of-death to sue on your stepfather’s debts.

Len & Rosie