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What Orange County Trust Owners need to know about A/B Trusts and Portability

Posted by James Burns | Oct 05, 2023 | 0 Comments

If you created an A/B trust prior to 2011 as part of your estate plan, you may be wondering how it now fits into the current legal landscape with portability. This asset distribution structure used to be very common for married couples. However, changes in tax law and portability provisions have made A/B trusts less necessary in some cases. Maintaining this complex structure can actually create unintended consequences today.

What is an A/B Trust?

An A/B trust is a joint trust structure meant to minimize estate taxes for married couples. Here is how it works:

Upon the first spouse's death, the trust divides into two parts. The A trust is designed to benefit the surviving spouse during their lifetime. They have access to its assets and income. The B trust holds property equal to the federal estate tax exclusion amount. Assets in this trust bypass the surviving spouse's estate and pass tax-free to other beneficiaries named in the trust.

This structure allows couples to double their estate tax exclusion. When the first spouse dies, they can use their exclusion. The survivor's exclusion is preserved for later use. This helped limit the impact of federal estate tax before the current high exemptions were in place.

Drawbacks of A/B Trusts in the Current Environment

A/B trusts made good sense under previous tax laws. But legislative changes have made them less useful:

- Higher estate tax exemptions - The federal exemption is now over $12 million per person. For most people, federal estate tax is no longer a concern. So the original purpose of sheltering assets in the B trust is moot.

- Portability - The 2011 Tax Relief Act allowed portability of any unused estate tax exclusion between spouses. So the survivor automatically inherits the deceased spouse's remaining exemption. No special trust planning is required.

- Step-up in cost basis - Assets transferred to heirs receive a step-up in cost basis to current market value. This saves on capital gains tax when heirs later sell. But assets in the B trust don't get this full step-up.

- Inflexibility - A/B trusts lock in specific terms that can become outdated. Amending them later often requires court approval, legal fees, and family consent.

- Complications - A/B trusts require dividing assets between the A and B trusts upon the first death. Ongoing administration is complex with separate accountings. This creates costs and confusion for surviving spouses and heirs.

Better Alternatives in the Current Environment

For many couples today, opting for simpler estate planning strategies is better than relying on A/B trusts:

- Outright bequests - Naming your spouse as the outright beneficiary is easier and more flexible. A simple will can be updated as needed.

- Revocable living trust - For probate avoidance, a basic revocable trust with spousal options works well. No second B trust is needed.

- Portability election - File IRS Form 706 after the first death to carry over the unused exemption. No special trust is required.

Consult an Attorney

If you have an existing A/B trust, don't try dismantling it on your own. Work with an estate planning attorney to review your specific situation. There may be ways to restructure your trust to simplify it while still protecting your assets and wishes. Given the many legislative changes, it's wise for those with older trusts to have them reviewed. A qualified attorney can ensure your plan adapts to the current legal environment.

While A/B trusts served an important purpose in the past, better options exist in many cases today. Consulting an attorney can help ensure your plan offers flexibility, simplicity and tax savings under the modern laws.

About the Author

James Burns

Estate Planning, Asset Protection, Business and Real Estate Transactions, nutraceutical Law and franchising:


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