Estate Planning Attorney says our AB or ABC Trust needs to be changed

[skipro33]

I got a letter from the attorney that set up our Revocable Living Trust, signed by us, a married couple, between 1981 and 2013, was an AB or ABC trust and WAS the gold standard. However, 2013 Tax Laws changed, and we should consider striking these provisions from the Estate Plan.
Condensed, it says "Amending your AB Trust in its entirety and converting to a Disclaimer Trust would remove all of these costly and burdensome requirements."

Is this something I need to change or is this just BS from some lawyer who is trying to get us to pay again for an estate plan?

The whole letter says:
"Currently, your AB Trust provides that, upon the first spouse's death, the Trust SHALL be divided into two sub-trusts: the Decedent's Trust and the Survivor's Trust. This forces the surviving spouse to spend thousands of dollars on appraisals, accounting and attorney fees splitting the Trust into two sub trusts, as well as providing all beneficiaries a complete copy of the trust and any and all documents after the first spouse's death, an annual accounting to each of them balanced to the penny and filing two separate income tax returns every year. The main reasons they used to recommend a division into two sub-trusts were:
1. Each spouse can set aside the maximum amount free from Federal Estate Taxes. Until recently, they anticipated the Exemption to be $1M. Anything over that limit was subject to a 55% federal estate tax.
AND
2. By setting the deceased spouse's share aside into an irrevocable trust, they were honoring his/her testamentary intentions.

At the time that the trust was prepared, the AB Trust was the gold standard of trusts partly because it would enable you as a married couple to effectively double the amount of asset you could pass to your beneficiaries free from Fedearl Estate and Gift taxes.
The Bush Tax Cuts has increased the Exemption Equivalent to $3.5M, but they werre to sunset on January 1, 2011, bringing the Exemption Equivalent back to $1M for persons dying after December 31, 2012.
This on-going uncertainty as to what the Exemption Equivalent amount would be in the year of our clients' deaths led experienced Estate Planning Attorneys to continue to recommend an AB Exemption Equivalent dropping back to $1M on Jan 1, 2013
The American Taxpayer Relief Act averty the so-called Fiscal Cliff and was signed into law on Jan 2, 2013. ATRA increased the Exemption Equivalent to $5.25M for 2012, $5.34M for 2014 and was permanent to be adjusted upward for inflation each year.
The Tax Act of 2017 raised the Exemption Amount to $11.18M per person, and it increased the Exemption Equivalent to $11.58M per person for 2020, $11.7M per spouse in 2021, and $12.06M in 2022. Gifts or transfers at death in excess of the Exemption Equivalent amount will be taxed at 40%
ATRA also made portability of a deceased spouse's unused Estate Tax Exemption permanent if made in a timely election after the death of the first spouse to die. Essentially, this allows the surviving spouse to use the Deceased Spouse's Unused Exempt Amount, DSUEA, for gift or Estate Tax purposes, doubling a married couple's Exemption to $23.7M.
If your estate is below $24.12M and you do not anticipate that it will reach that size, you would not benefit from the estate tax benefits provided by tan AB Trust. So why subject the surviving spouse to the appraisal fees, accounting fees and attorney fees associated with the administration of an AB Trust along with giving everyone named in the Trust or any amendments a complete copy of the Trust after the first death and an annual accounting?
One additional potential benefit of doing an AB Trust would be to honor the testamentary intentions of the first spouse to die, preventing the surviving spouse from changing the predeceased spouse's testamentary intentions. The surviving spouse could only change their portion of the Trust, not the deceased spouse's. If this is a concern, there ar far easier ways to accomplish this than keeping an AB Trust, specifically with what is known as a qualified terminable interest trust QTIP.
WHY SWITCH TO A DISCLAIMER TRUST?
The downside of the AB Trust has always included:
1. The confidentiality, and legal, appraisal and administrative fees involved with having to prepare an Allocation Agreement after the first spouse died, listing and valuing all the assets in the Trust and then deciding which assets go into the deceased spouse's Bypass Trust and which assets goig into the surviving spouse's Trust.
2. The ongoing administrative fees involve with filing a Fiduciary Income Tax Return on the deceased spouse's life and a 1040 for the surviving spouse
3. Not receiving a step-up in basis on the deceased spouse's Trust assets when the surviving spouse dies.
California Law requires the surviving spouse to provide everyone named in the Trust and any amendments a complete copy of the Trust after the frist spouse's death and an annual accounting balanced to the penny outlining what the surviving spouse has done in the previous year with the deceased spouse's portion of the estate.
4. The administrative burden on your surviving spouse of having to maintain two separate trusts.

Amending your AB Trust in its entirety and converting to a Disclaimer Trust would remove all of these costly and burdensome requirements.

As a client we extend a 40% discount on our norman fees to amend and restate an AB trust.
The rest is how to call and set up an appointment.

Is this something I need to attend to, or is it a means to charge us again to set up our living trust?

EDIT
We live in California.

 

[wolf]

Also live in California.
IMHO: To keep it simple.

Yes, you need to have A/B, removed. When inheritance tax was low (around I'm guessing $650,000 per person many, many, years ago). Having A/B,
allowed married couple to in essence "double inheritance tax exemption, 2 x $650K.

Currently, Federal inheritance tax exemption, around $12 million or so.
So unless your estate is huge, most people do not need A/B.
And if A/B not removed, when one spouse dies, you will be forced to set up
another "irrevocable trust", and keep the current revocable trust.

 

[skipro33]

Also live in California.
IMHO: To keep it simple.

Yes, you need to have A/B, removed. When inheritance tax was low (around I'm guessing $650,000 per person many, many, years ago). Having A/B,
allowed married couple to in essence "double inheritance tax exemption, 2 x $650K.

Currently, Federal inheritance tax exemption, around $12 million or so.
So unless your estate is huge, most people do not need A/B.
And if A/B not removed, when one spouse dies, you will be forced to set up
another "irrevocable trust", and keep the current revocable trust.

O.K. Thank you for that info. I guess I'll make a call tomorrow for an appointment then.

 

[Souschef]

I had an AB trust, and when the laws changed, I was too lazy to change it. My wife passed away in 2005, and I had to divide up the property, assets, etc. I also had to file a form 1041 and CA541 every year.
I sold our house in 2014. and closed the trust. There was a provision that if assets fell to less than 40K the trust could be dissolved.

 

[Telly]

skipro, this is a great thread topic! Thanks!

We too have an AB trust. Created in that era that the exemption would soon be lowered to $1 mil. I had to flow-chart it to understand how it works, to see the different states it can pass through over time. As the years have gone by, it now seems rather complicated. And I have to admit, I have never seen the details, the mechanics, of what has to happen, when going from one state to another. Like how many tax returns, valuations, etc. etc. The going thoughts were that the surviving spouse would hire an accountant versed in the subject, and a lawyer. Which seems nebulous, and makes me uncomfortable thinking about it.

Also, at least in my state, when the first spouse dies, the surviving spouse can retain whatever $ "to keep them in the lifestyle that they have been accustomed to". When I asked what that meant, we were told that there was no legal definition for that... So it appeared that the surviving spouse could say "I'm taking it ALL! ALL I tell you!" (All except the Separate Property owned by the deceased). Which seems to deflate the testamentary intentions of the deceased spouse.

Years have gone by, our kids have been out in the world and are doing well on their own, and the tax exemption issue went away for us. Seems like we should simplify and make it easier on the surviving spouse to handle it. I'm not sure what the replacement plan could be or how it would work. Probably something to tackle in the next year.

 

[SecondCor521]

My parents' wills and trusts were set up a long time ago and last amended in 1999 to an AB trust. My Mom passed away in 2016 and so the 1999 documents were in effect.

I think a lot of the language in the letter about appraisals and compliance costs haven't applied in our situation. We did get an EIN from the IRS (free, easy, one time). We did have to set up a B Trust account at Vanguard (free, easy, one time). We did have to move assets into the B Trust per the trust and will (free, easy, one time).

We do have to file a 1041 and our state equivalent every year. We paid an accountant to do it the first year or two, then I took it over, so now it is free and only a modest pain once a year.

We didn't have to do any appraisals, and any disclosures to beneficiaries were not a big deal - send a copy of the will and trust to my Dad, my two sisters, and me. Those would probably be required at some point anyway.

We're not required to do any annual balance sheets to the penny. But it'd be easy to do so anyway - log in to Vanguard and print off a year end statement of the one account. But we're not in California.

The few sentences about honoring the decedent's intentions just strikes me as silly. All estate planning documents honor the decedent's intentions, nearly by definition.

Trust income tax rates are quite high. You can find the tax brackets in the instructions for Form 1041, I think they're in Schedule G. Trusts can also get hit with NIIT and AMT at low levels. My Mom's B Trust doesn't throw off that much income, so it's not a big deal. If you want to fiddle with DNI, you can pass the income to the beneficiary (usually the surviving spouse), and that (a) gets the income taxed at the beneficiary's tax rates, but (b) is a bit complicated to do the accounting, and (c) puts that income into the beneficiary's estate.

The loss of the step up might also be an issue. The B Trust assets got a full step up at my Mom's death (community property state might be relevant here), but has grown since then and because of the AB structure will not get a second step up at my Dad's passing. I have investigated possibly making a QTIP election on the B Trust, which might be worth the time and hassle depending on the circumstances. (QTIP elections are a bit complicated but basically allow you to retroactively change assets from first-to-die to second-to-die, getting a second step up. They are tricky, and there are requirements. They're similar in my mind to disclaimer trusts.)

My parents did have some outdated legalese in their wills and trust documentation which required us at the time to pay an additional $16K in legal fees to do a TEDRA agreement. A TEDRA basically is an after death way to amend a deceased person's estate plan, but it's sort of unusual.

In summary, my parents have paid twice for expensive legal documents to avoid even more expensive taxes, and I'm being advised to pay a third time to essentially end up in a place where the net result is back to square 1.

I'm tracking what happens to the basic exclusion amount over the next few years and will react as needed. Currently it gets divided in half on 1/1/2026.

 

[OldShooter]

No surprise that a 10+ year old estate plan needs updating. Our experience is that at least some tuning is needed every few years. Assets change, our desires change, beneficiaries become young adults, state and federal laws change. And, of course, some future law changes are on the horizon and should be anticipated to the extent possible. I again come back, though, to the point that as a percentage of the assets to be dealt with, a good and up to date estate plan is not a big deal. It is only when we cheapskates think of the plan cost in dollars that it feels like a big deal to us.

 

[Souschef]

In my case, I needed an appraisal to establish the stepped up basis of our home. I also divided the home between the two trusts so that the B trust payed half the home's expenses such as mortgage, taxes and utilities.

 

[Telly]

Doing some searching, I realized that DW and I actually have an AB Disclaimer Trust, not an AB Trust. So the issue that skipro's brought up does not apply to DW and me.

However, the trust we do have seems very complicated, am concerned about whatever actions/decisions the surviving spouse needs to make. Will have to review it. Maybe it's the best way after all, maybe not. Maybe as we've aged, and kids have moved on too, some concerns we had years ago have become moot. We need to learn the mechanics of what we have. Professional help may be needed to evaluate.

 

[Out of Steam]

No surprise that a 10+ year old estate plan needs updating. Our experience is that at least some tuning is needed every few years.

We were told when we did our estate plan (no trust right now), that if our situation didn't change before then, 10 years was a good time for updating.

Small things accumulate even without major life changes. Because our daughter was not long out of college when our will was written, it contains provisions for a niece to be the primary executor (in the event we both die) until our daughter is 30. Since our daughter manages her own retirement accounts and assists others her age with finances, I'm not sure that provision is still needed.

 

[skipro33]

Thank you all for the replies. I'm baffled by the whole process, completely ignorant of most of what that letter said and the replies here other than it's something I need to get done sooner rather than later.

My assets are not all that great; likely just my real estate/home (paid for) value at or about $800,000. The contents of the home, my IRA of around $500,000 of which we do not take any draws but understand we will need to when I reach RMD age and bank accounts of at least $100,000 but under $200,000. I have a pension that will continue to pay its full amount upon the passing of either of us which has a 5% COLA cap, and Social Security, which is about $2,000 for me and $1,000 for DW per month, totaling right at $10,000 a month gross. Our monthly expenses are around $5,000, leaving a lot to accumulate in checking which is why I said our bank accounts are between $100 and $200K. That totals up to about $1.5M estate plus personal property of no real value to anyone but us (call it less than $100,000 if liquidated. Much less most likely. Who wants other people's personal property, AKA their crap...)
I'm not even sure I need a trust other than to protect the home's value in the event of being sued. My sis-in-law's husband passed away, left her with a $1M home and the funds from selling his franchise business before he died, without any trust, will or anything and she just inherited it all without any obvious legal issues. She lives in Idaho.

I'm curious what I will be charged for making the change from AB Trust to this Disclaimer Trust. Any idea what I can expect? His letter said the cost would be discounted 40% since we are already his customers.

My parents had this exact same AB trust, and I don't recall anything done any different for my dad when my mom passed away several years ago. Then when Dad passed away a year ago, I don't recall anything we had to do either other than to call the banks and insurance companies to collect his accounts. When Mom passed, they owned a home, but when Dad passed, he owned nothing other than a couple bank/checking accounts and an insurance policy with around $120,000 which my brother and I split equally. (We had Dad cash his life insurance policies before he passed away, the payout only a couple points different than waiting until after he died, and he likely would have needed it if he had lived even a year longer)
Again, no lawyers, and no contact with anyone about the trust. The bank accounts where in both brother and Dad's names so there would be no issue when he passed away.

I have the initial consultation, no charge, on the 17th of November. Just called today to make that appointment. It will be via phone, but the option was in person or phone. What questions should I be asking about other than the cost? I imagine I will ask about any advantage to keep the trust or to just let it go and update, if necessary, our wills.

One last note: some may recall I was diagnosed with an incurable cancer 2 years ago. Prognosis is good, but it will return, and I'll likely die sooner than my otherwise life expectancy. I almost bought the farm when I came down with COVID this spring and in an ICU for a couple weeks. The chemo wiped out my immune system and no vax or monoclonal antibodies have any effect on my immune system. Since it's more likely than not that my wife will outlive me, and she's unable to actively manage investments or the maintenance of our home. That she would likely sell the house and live in a retirement or independent living community to simplify things.

Thanks for any advice on going forward with abandoning the AB Trust, rolling over to a Disclaimer Trust or no trust at all and revoking the AB Trust as well as anticipated cost of the AB to Disclaimer fees or anything else for that matter.

 

[daylatedollarshort]

I know we have AB trust of some type. Contacting the attorney and getting it updated has been on my to do list for some time. This thread helped me move it to the top of the queue.

 

[TrvlBug]

DH and I have been putting off estate planning for way too long (mostly DH's fault) and just had a first meeting with our Fido rep and one of their estate planning specialist. Great info and DH is on board with finally getting this done.

One of the things that really opened our eyes was that most couples think that that if one is incapacitated, the other can easily take over. NOT so for individual accounts...think retirement accounts, social security, Medicare, and the like. It really opened our eyes that we need to get generic POAs in place now with the more comprehensive POAs coming with the plan. I even thought that since we have trading ability for each others' accounts, it would allow us to do what we needed. Again, not so (we can do lots, but there are limits), we need a higher level of access which a POA provides.

The specialist confirmed that your plan should be reviewed every 5-10 years for changes/updates that need to be incorporated.

Got to get my spreadsheet ready .

 

[CRLLS]

Just to be clear, if the surviving spouse in an AB trust does not "create" the necessary trusts, what happens when the 2nd spouse passes? In DW's case, it was treated as a "traditional" living trust. During the 10 years after her father died, the required trusts were not made and DM simply assumed the husband's trust proceeds into her own. When she passed, there was just 1 trust to deal with. It too still had the AB provisions.

 

[Dash man]

We each have separate trusts with each other as co-trustees. Our attorneys wouldn’t allow us to have separate trusts. It solves a lot of problems.