Historically, the type of trust a married couple created during life affected the estate tax savings available to the children following the couple’s death. Beginning in 2011, and made permanent with the passage of the American Tax Relief Act of
2012 (“ATRA”), a married couple can protect more than $10 million of assets from the estate tax, regardless of the type of trust they execute. Thanks to the Trump tax cuts, the amount which is exempt from estate tax has now been
(temporarily) doubled to $10 million plus inflation, meaning a married couple can shelter more than $20 million. The type of living trust a couple selects is now driven by a desire for control, perhaps due to blended families or
differences in wealth.
Please keep in mind that there are other considerations, such as retirement planning, income tax, and capital gains tax, which are not addressed on this website. You should speak with a qualified attorney before making any decision as to which form of living trust is best for your situation.
Simple “Couple” Trust
In a “simple” form of living trust, a married couple jointly shares control and benefits during their lifetime. At the death of the first spouse (the “deceased spouse”), the surviving spouse retains complete control over the trust and can even change the beneficiaries. At the surviving spouse’s death, the assets are distributed to the beneficiaries without probate, provided the assets are kept in the living trust during the surviving spouse’s lifetime. This is the easiest type of trust because no additional income tax return is required and because the surviving spouse can manage the trust as he or she sees fit. At the surviving spouse’s death, there will be estate taxes if the size of the surviving spouse’s estate (living trust, plus any other assets owned by the surviving spouse, including life insurance and retirement accounts) is greater than the amount excluded from estate taxes (the “applicable exclusion amount”) available to the surviving spouse at his or her death. The exclusion could be as low as $12.92 million and as high as $25.84 million (2023), depending on whether the surviving spouse filed an election at the deceased spouse’s death and made any large lifetime gifts.
An A/B Trust is administered identically to a “simple” living trust while both spouses are alive. Unlike the simple trust, when the deceased spouse dies, the A/B Trust divides the couple's estate into two trusts. The B Trust (known as the “Bypass Trust”) is equal to the lesser of (a) the applicable exclusion amount or (b) the deceased spouse’s separate property plus half of the couple’s community property. The A Trust (known as the "Survivor's Trust") contains the balance of the couple's assets.
The surviving spouse may use the funds in the Survivor's Trust without restrictions and retains the right to amend the Survivor’s Trust at any time. Although the surviving spouse may be the Trustee and sole beneficiary of the Bypass Trust as well, that trust limits the spouse’s use of the funds to health, education, support, and maintenance of standard of living. Cash for vacations and gifts are to be drawn from the Survivor’s Trust, and the surviving spouse cannot change the beneficiaries of the Bypass Trust. The Bypass Trust protects the heirs of the deceased spouse, because the surviving spouse cannot change the beneficiaries and cannot deplete the funds for extraneous purposes. However, the surviving spouse will be saddled with more work to administer the separate accounts held in the Bypass Trust and will need to file an extra income tax return for every remaining year of the survivor’s life.
At the surviving spouse’s death, the Bypass Trust will pass to the deceased spouse’s heirs free of estate taxes, even if the assets in the Bypass Trust appreciate to greater than the applicable exclusion amount. The Survivor’s Trust will pass to the surviving spouse’s heirs and will only be subject to estate taxes if the surviving spouse's assets are greater than the applicable exclusion amount in the year of the survivor's death ($12.06 million in 2022).
If a couple is extremely wealthy and establishes an A/B Trust, then at the death of the deceased spouse, the applicable exclusion amount will be held in the Bypass Trust, but the balance of the couple’s estate will be held exclusively by the surviving spouse in the Survivor’s Trust. In 2023, in an estate of $30 million, $12.92 million would be held in the Bypass Trust and $17.08 million in the Survivor’s Trust.
If the surviving spouse remarries, begins to support a new charity, or gets into an argument with one of the couple’s children, the surviving spouse can amend the entire Survivor’s Trust and completely change the beneficiaries. Only the amounts left in the Bypass Trust will be distributed to the people the deceased spouse intended to benefit.
The A/B/QTIP Trust allows the deceased spouse to control more than just the applicable exclusion amount held in the Bypass Trust. Those assets of the deceased spouse that exceed the applicable exclusion amount are deposited in a third trust (the “QTIP Trust”), rather than distributed to the Survivor’s Trust. That way, each spouse has control over half of their assets, and the benefits are not lopsided in favor of the heirs of the surviving spouse.
The surviving spouse is often the Trustee and must be the only beneficiary of the new QTIP Trust. If a couple with a large estate has children from earlier marriages or do not agree on the distributions to their ultimate beneficiaries, the A/B/QTIP Trust is preferable to the simpler A/B Trust option. In the A/B/QTIP Trust, regardless of the size of the couple’s estate, the husband may leave his estate to one group of heirs after the death of the surviving spouse and the wife may leave her estate to other heirs. Both spouses can feel confident in their estate plan.