Simple “Couple” Trust | A/B Trust | A/B/QTIP
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.
A/B Trust
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).
A/B/QTIP
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.