In this article, we discuss A-B Trusts and why you should consider having your Trust reviewed by a California Estate Planning Attorney now.

Under the current Estate Tax regime, it is often unnecessary for a married couple to have what is commonly called an A-B Trust. The “A” portion being the “Survivor’s Trust” and the “B” portion being the “Bypass Trust.” The A-B Trust presents a number of tax, cost and other problems that can easily be avoided when both spouses are living, but even if one spouse has died, there are legal strategies that can help.

Do I Need a Bypass Trust?

I won’t cover all the reasons why a Bypass Trust may still be needed, but, simply put, if a married couple is very high net worth (think top 1%), they should probably still have a Bypass Trust. In an uncertain Estate Tax Law environment though, even if a Trust should have provisions for a Bypass Trust, it should provide some flexibility for the surviving spouse to not fund the Bypass Trust if it doesn’t make any sense tax-wise. Former President Trump’s tax plan gets rid of the Estate Tax altogether, but other than a repeal of the Estate Tax, other details are murky. What if the Estate Tax is repealed and portability goes away, but the Estate Tax is brought back years later after one spouse has already died during the repeal? What if the Estate Tax exemption increases even further? Or, decreases? Since no one has a crystal ball, flexibility in the Trust is your best friend.

Disadvantages of a Bypass Trust

Some of the disadvantages of a Bypass Trust include (take a deep breath!) no adjusted cost basis for Bypass Trust assets on the surviving spouse’s death, the cost to allocate assets to the Bypass Trust when the first spouse dies, ongoing administration costs of administering the Bypass Trust, the Bypass Trust cannot be changed by the surviving spouse and a principal residence in a Bypass Trust does not qualify for the IRC 121 exemption. Not having an adjusted cost basis when the surviving spouse dies can cause the heirs thousands in capital gains taxes.

I recently handled a case where there had been significant appreciation of the Bypass Trust assets since the first spouse died. If the heirs were to sell the appreciated property after the surviving spouse dies, it would result in over $100,000 in capital gains taxes. Fortunately, we were able to amend the Bypass Trust in court, which amendment will result in the Bypass Trust assets receiving an adjusted cost basis upon the surviving spouse’s death.

Terminating a Bypass Trust

What if you don’t need a Bypass Trust, but you still have one? If both spouses are living, getting rid of an A-B Trust is as simple as amending and restating their current Trust. However, when one spouse has already passed away, amending the Trust is no longer an option because the Bypass Trust is irrevocable. However, an Irrevocable Trust can be modified in court in a way which results in an adjusted cost basis on the surviving spouse’s death, like in the above example. This strategy is not for every client with a Bypass Trust, but there are other options that may be available depending on the terms of the Trust.

If you know someone with an A-B Trust and both spouses are still living, please encourage them to have their Trust amended right away. And if you know someone who already has a Bypass Trust that was established when their spouse died, it would be my pleasure to help them explore their options to get rid of it.

What Do We Do as California Estate Planning Attorney Specialists?

The lawyers and staff at CunninghamLegal help people plan for some of the most difficult times in their lives; then we guide them when those times come.

Make an appointment to meet with CunninghamLegal for California Estate Planning and Trust Administration. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call (866) 988-3956 or book an appointment online.

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We look forward to working with you!

Best, Jim

James Cunningham Jr., Esq.

Founder, CunninghamLegal

At CunninghamLegal, we guide savvy, caring families in the protection and transfer of multi-generational wealth.


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