February 1, 2007

The dangers of the ‘Typical’ Revocable Living Trust for married couples

By Robert Bergman
Special to the Times

If you are married and have an estate plan, you probably have a typical “A/B” revocable living trust. These trusts were designed to take advantage of the relatively small federal estate tax exemptions available at that time, by assuring that the estate tax exemption of the first spouse to die would not be wasted.

This is done by requiring that the surviving spouse divide the couples’ property, and put the property that was owned by the deceased spouse into a new, irrevocable (i.e. unchangeable) trust for the benefit of the surviving spouse and the children. This new trust is the “B Trust,” which may be called other things in your estate plan such as the Family Trust, Exemption Trust, Bypass Trust, or some other language. Sound familiar?

Unfortunately, because of major changes in the federal estate tax laws in 2001, the “typical” A/B trust may no longer be appropriate or even necessary for couples. This is because the federal estate tax exemption amounts have been rising over the past several years. As a result, one tax exemption may be more than sufficient to cover the value of a couples’ entire estate, often reducing or even eliminating the need to divide the property at the first death.

It gets worse. The current federal estate tax exemption is $2,000,000, and will stay that way for 2007 and 2008. In 2009, the exemption will go up to $3,500,000, and in 2010, the federal estate tax will be eliminated for the entire year! Unfortunately, on January 1, 2011, the federal estate tax will return with a vengeance, and the tax exemption will be reduced back to only $1,000,000.

Congress can change these laws at any time, provided they feel that there is a need to do so. Unfortunately, we can’t predict the following: 1) what the federal estate tax exemption will be when you and your spouse die; 2) when you and your spouse will die; and 3) what you own and how much you will be worth when you die.

The A/B living trust could turn out to be a very good choice or a very bad choice, depending solely on when you die and what you are worth on that date! In other words, sometimes you might want to use some or all of the tax exemption of the first spouse, and sometimes you might want to have everything go to the surviving spouse.

Because of this, revocable living trusts should permit a high degree of flexibility for the surviving spouse or someone else (called a “Trust Protector”) to decide whether or not to use the federal tax exemption of the first spouse to die. Such trusts can be customized for your particular situation, and can provide as much flexibility as you wish. If you have a typical “A/B” trust, it’s time to have it reviewed.

Robert P. Bergman is an estate planning attorney and counselor who devotes his law practice exclusively to assisting individuals and couples plan for their possible incapacity and the eventual transfer of their property to their heirs. If you would like access other articles by Bergman visit his Web site at www.lawbob.com You can also reach him by e-mail at rpb@lawbob.com, fax at (408) 416-4591, telephone at (408) 247-0444, or mail at 920 Saratoga Avenue, Suite 107, San Jose, CA 95129. All inquiries are confidential. This column is intended to provide general information about estate planning ideas, concepts, and laws, and is not to be relied upon as rendering legal advice about your particular situation. No attorney-client relationship is created by these articles. The laws concerning estate planning, wills, trusts, and estate taxes are very complex, often state-specific, and change on a regular basis. Consult with an experienced attorney before taking any action that would affect your personal or business matters.