New Portability Law Simplifies Planning Between Spouses:
Prior to 2011 only the issue of estate taxes – more specifically the possible need to utilize both spouses’ estate tax exemptions introduced complications to the otherwise straightforward wish of most married couples for the surviving spouse to inherit all assets at the first spouse’s death. In other words most couples only agreed to the AB structure as an advised tax strategy and otherwise had no desire to burden and restrict the surviving spouse. Hopefully the need for such complications is now a thing of the past because current law now allows portability of the exemption between spouses*. Under portability the surviving spouse is now allowed the straightforward use of both (husband’s and wife’s) exemptions without the need for any special (AB) sub-trust planning and its accompanying red tape. With portability spouses can safely do what most of them have been telling us they want to do for years: leave their estates outright to each other (which is not what the AB trust does as you’ll learn!)

Current Exemption is Now $5 Million per Person ($10 Million for a Surviving Spouse):
The current estate tax exemption has been raised to $5 Million*. All by itself this higher rate would nullify any need for the hassles of an exemption sub-trust for most (less than 1% of households are worth over $5 Million in 2011) -- yet portability is what fully eliminates any need for an exemption sub-trust from a tax standpoint. With portability, under current law a surviving spouse will be allowed to pass up to $10 Million estate tax-free – no AB, ABC or exemption sub-trust necessary. With portability, an AB, ABC (or even exercising a Disclaimer) will not buy you one extra dime in exemption. As long as portability remains law (and we think it will), from a tax standpoint there is simply no reason to have or continue with an AB or ABC trust and every reason not to if you wish matters to be as flexible, simple, and straightforward for your spouse as possible.

The Lingering Legacy & Problems of Continuing With or Electing an AB Trust Format:
To reiterate, it has long been a standard practice at many law offices for married couples to sign up for the AB trust approach as a way to insure the use of both spouses’ exemptions. Under new current law however an AB trust 1) no longer buys any estate tax advantage, 2) needlessly risks losing major income tax benefits and 3) will still burden the surviving spouse with significant restrictions, tax filings, irrevocability, accountability, and other legal responsibilities for life. That is why if you have a married living trust it is very important to review it for this issue or there is a strong possibility you or your surviving spouse may be stuck with burdensome restrictions you no longer want or need – and worse yet will do you no tax good at all! No one can speak better to this issue than the countless surviving spouses we have met with over the years who seem to universally dislike and regret being saddled with the requirements of the AB format. Read on if you want to know why!

Responsibilities & Burdens of an AB Trust on the Surviving Spouse:
1) The B trust becomes irrevocable and non-amendable upon the first spouse’s death (the surviving spouse cannot alter those trusts, or add, change, or remove beneficiaries or gifts from those trusts).  2) The surviving spouse’s use of the assets in the B trust must be limited to an ascertainable standard.  3) As the successor trustee the surviving spouse is responsible and answerable to the future “inheritors” of the B trust for appropriately using the assets and must render accountings as well as provide a copy of the trust to the heirs and future beneficiaries.  4) The surviving spouse must properly allocate, title assets in, obtain tax ID numbers for, and maintain the B trust after the first spouse’s death. 5) During the surviving spouse’s entire remaining lifetime they must continue to accurately track and keep records of the assets and transactions of each trust and complete separate tax filings for the A & B trusts each year.

Remember, an AB Trust Requires Adherence to Its Terms No Matter Portability, What Your Net Worth Is or What The Exemption Is at the time of death.
The existence of higher exemptions or portability does not and will not relieve the surviving spouse from the AB trust requirements. Using or keeping an A/B trust still means you will force the surviving spouse to live with the aforementioned lifetime restrictions and legal responsibilities. An A/B trust doesn’t care about the exemption amount or portability, it still legally requires the surviving spouse to comply with its strictures -- unless you update your trust. Worse yet, it can actually become a tax negative, exposing the surviving spouse and heirs to needlessly lost income tax advantages.

Lost Income Tax Advantages of an AB Trust
Anyone with an AB trust should also clearly understand there is no step-up in basis for the B (or C) trust assets at the surviving spouse’s death or capital gain exclusion for a residence allocated to the B or C trust. Many times this can ultimately end up being a very costly lost income tax benefit and now it is completely needless from a tax standpoint with portability.

An AB Trust Gives Children the Power to Make The Survivors Life Very Difficult & Expensive:
Using the AB trust terms as the legal leverage, we have seen more than one case where the surviving spouse has been harassed and taken to court by their very own children. Despite having essentially done nothing inappropriate these surviving spouses were nonetheless forced to respond to their children’s lawyers, demand- letters and lawsuits. That’s because the AB trust gave their children legal standing to demand accountings and justification for the expenditures and management of the trust assets.  Since our court system generally lets everything play out, the surviving spouse is forced to respond, make court appearances and spend thousands or tens of thousands of dollars in legal fees. There is no time to fully chronicle these sad stories but just understand these spouses suffer from a great deal of regret for having ever signed up for an AB(C) trust! These are some of the dark sides of an AB trust that often are not emphasized at the time someone is telling you “how great they are” and why.

It Is No Surprise Surviving Spouses Dislike Living with the AB Trust (and Never Forget That Could Be You!):
It isn’t hard to see, that even under circumstances where it turned out to make tax-sense, why we never encountered a surviving spouse who liked having to live with an AB (or ABC) trust. We found that somehow they never seemed to share a lawyer’s or accountant’s opinion that “administering an AB, ABC, or any exemption trust is no big deal”. A word to the wise: In considering whether you wish the surviving spouse to live with the restrictions and burdens of an AB or ABC trust you should always keep in mind you may well be the surviving spouse who has to live with it!

The (Flawed) Assumptions of the AB & ABC Trust Approaches:
It is important to reiterate that throughout the 80’s, 90’s, and beyond the AB trust was most often the default choice. Because of the then-lower estate-tax exemptions, almost all law offices universally encouraged these approaches from a perspective of assumed need. Yet that assumed need, it has turned out, often ended up being wrong. That’s because the exemption amounts began rising dramatically in the year 2000 and from a tax standpoint (with the increased exemptions) many couples didn’t end up being worth enough to justify the complications of an AB or ABC trust (totally unnecessary to pass the combined estate tax free). This essentially made the AB and ABC trust a completely useless albatross for those who otherwise just wanted to leave everything outright to their spouse. Understanding this is important as a matter of perspective -- because sadly it seems many stayed stuck in the past beyond the year 2000 tax changes meaning many cling to the past now.

We Began Offering a More Flexible Alternative called the Disclaimer Approach in 1999:
Foreseeing that the AB (ABC) trust could easily turn into a fruitless, negative burden on the surviving spouse we began offering (in mid 1999) a more flexible alternative called the “Disclaimer Approach”. Unlike the AB & ABC trust, the Disclaimer approach does not lock the surviving spouse into a course of action. Instead of speculating, the Disclaimer approach allows the surviving spouse to make the determination according to the important data points as they actually exist at the first spouse’s death.  If circumstances warrant it, the surviving spouse has nine months from the date of the first spouse’s death to trigger the funding of the exemption sub-trust through the use of disclaimers (essentially turn it into an AB trust). This optional approach ultimately prevented countless surviving spouses from being forced to live with the headaches and restrictions of an AB trust. As long as portability remains law however, it is unlikely any surviving spouse will find it necessary to exercise a Disclaimer for the purposes discussed herein. As a safety precaution however, we leave the Disclaimer language in our current trust structure as a hedge against the future just in case things revert back to the old way. We tell you this because no doubt, as before, there will be a great deal of fear mongering in this regard to continue to co-opt people into AB trusts and other convoluted measures.

*The Disclaimer Option Remains as A Safety Valve For What the Future May Hold:
As many of you are aware Congress has a crazy habit of passing temporary laws. So it is true with the estate tax laws for 2011 and 2012. They must again take up this matter before it expires or the exemption will revert to the 2000 level of $1 Million. As a matter of perspective, when our lawmakers debated and passed the tax extensions in late 2010 neither party nor the President was pushing for the exemption to drop back to $1 Million. (The debate was between $3.5 Million; $5 Million, and outright elimination of the estate tax.) More importantly there was little or no opposition to portability of the exemption between spouses. (The President and leadership of both parties were on record as favoring portability). Of course predicting the future is always an uncertain proposition but we think this is a pretty good indication about what it may hold. Nonetheless all our married trusts will continue to contain the Disclaimer Trust as a safety valve that the surviving spouse will have the option to utilize if future circumstances so warrant. This approach made sense to nearly 95% of our married couples through 2010 and we think most will agree it probably makes even more sense now! The choice is yours however, as there are those of you who may be fearful about the future, don't like the personal responsibility, or are worried about your spouse's good judgment or ability to exercise a Disclaimer. Whatever the reason, we will continue to structure anyone in an AB (or ABC) trust if you so choose.

Is It More Than A Tax Issue To You!
In all fairness, this can be more than a tax analysis for some couples. If you are highly concerned with what your spouse does with your share, trust structure becomes much more than a tax issue and enters a whole new realm called “preserving testamentary intent”. As such, some spouses want to use the legally obligating, restrictive nature of the AB and ABC trust as a testamentary intent preserving tool. This is where it gets tricky, because when thinking about such a strategy, you have to ask yourself just how worried you are. That is because preserving your testamentary intent might be great in theory, but it is important that you also understand that it is not a free ride. Again, doing so requires you to impose the aforementioned conditions, responsibilities, inflexibility, bookwork, accountings, tax filings, accountability and liability to others, reporting requirements, and other hassles on the surviving spouse for life. Once this is clearly understood, it in fact gives major pause for many to force these conditions on their spouse.

In weighing whether you desire to structure your trust to guard against this issue, also remember to never lose sight of the fact that you may be the spouse who was worried about this issue, only to be the one left behind with your own self-created quagmire. This possibility alone causes many spouses to decline such a strategy. That is why you each must carefully weigh just how much this concerns you. If it is just a small concern you may want to think twice before you impose such requirements. If it is a large and genuine concern to you then these measures may well be justified and appropriate for your situation. This is an individual choice. There is no right or wrong in this decision, just philosophies and varying approaches to these issues. In the end you should always choose together what makes you comfortable and suits your situation. If you are interested in such a strategy you can read more about it by clicking the link below entitled “Restricting the Surviving Spouse”.

Restricting the Surviving Spouse (Click Here to Learn More)