September 3, 2020

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For many years, the most common reason for the A/B Trust structure was planning for the estate tax which is a tax on inheritance. With the high number of lawsuits that are filed each year, and the fact that the number one reason for bankruptcy in the United States is unpaid medical bills, many people are worried about asset protection. While many couples may feel that the A/B Trust structure is no longer necessary for estate tax purposes, they might still like the control or asset protection features. With a traditional A/B Trust, the B Trust is designed to utilize the deceased spouse’s estate tax exemption, often mitigating or eliminating the application of the estate tax. However, if structured properly, individuals can create trusts for third parties that provide a significant degree of asset protection. If it is a choice between the application of the estate tax and the application of the capital gains tax, then typically the capital gains tax is the better tax. CA While the estate tax rate has varied over the years, it had been as high as 55%. QTIP = $2,000,000.00. Reading this article does not establish an attorney/client relationship. So, upon the first death, Bypass trust utilizes decedent spouses estate tax exemption, and the QTIP qualifies for the estate tax marital deduction resulting in no estate taxes at death. The general rule in California, as with most states, is that individuals cannot create trusts for themselves with their own assets and give themselves asset protection. Disclaimer | Website Development by Zola. However, the surviving spouse is given the option to choose the tax treatment of the B Trust: either keep it as a traditional B Trust which provides estate tax protection but often results in higher capital gains tax, or treat it as a “QTIP Trust” which does not provide estate tax protection but is more favorable with respect to the capital gains tax. However, for the vast majority of estates where there will be no estate tax regardless of whether there is a traditional A/B Trust structure because of today’s very high estate tax exemption, a traditional A/B Trust structure can unnecessarily cause higher capital gains tax. Website developed in accordance with Web Content Accessibility Guidelines 2.0. In 2015, with the estate tax exemption at $5,430,000 per person, few married couples need an A/B Trust structure for estate tax purposes because one spouse’s exemption is often enough to cover the entire estate. This estate tax benefit comes with a catch: assets held in the B Trust will not receive a “step-up” in basis for capital gains tax purposes upon the death of the surviving spouse. However, if there is concern or interest in control or asset protection, then perhaps a Clayton Election is preferable to a traditional A/B Trust structure. For example, if a couple in 1997 had an estate worth $1,000,000, one spouse’s estate tax exemption ($600,000 at the time) would not be enough to prevent application of the estate tax and the $400,000 difference would be taxed at an extraordinary rate. Pacific Grove, 704-D Forest Avenue, Furthermore, an A/B Trust can be designed to limit the surviving spouse’s access to the B Trust or can require that a child of the deceased spouse or other trusted individual serve as co-trustee or sole trustee of the B Trust. There are typically three main reasons for married couples to structure their trust in this manner. This is a common concern with blended families where there are separate children of one or both spouses. While the surviving spouse will generally have the authority to modify the provisions of the revocable A Trust, the surviving spouse will often be prevented from changing the beneficiaries of the irrevocable B Trust after the death of the surviving spouse. 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