California AB Living Trust: Advantages and Disadvantages
The primary advantage of a San Diego AB living trust is the potential to reduce or avoid estate tax. Although spouses can leave money to one another without having to pay estate tax immediately, establishing an AB living trust can help avoid those taxes even when the second spouse dies. For example, if a wife dies, leaving her husband all of her money, and then the husband dies, beneficiaries must pay estate taxes on whatever portion of the collective estate is not protected by estate tax exemption. Estate tax exemption indicates the portion of your assets for which you do not have to pay estate tax. Your San Diego living trust attorney can help you determine estate tax exemption for your specific financial situation.
Estate tax must be paid on both the A and B portion of a joint living trust when the owner of each dies. However, instead of the assets in each San Diego living trust being combined, the A and B trusts will be taxed separately, and at different times, at the death of each spouse.
For example, if in 2011 estate tax exemption was $5 million, and each spouse dies with $5 million in the A trust and $5 million in the B trust, then no estate taxes will be owed. If the couple had created a San Diego living trust without AB provisions, estate tax would have been owed on $5 million. Similarly, if the first spouse dies with $6 million in trust A, and the second spouse dies with $7 million in trust B, estate tax will be owed on $3 million.
However, without a California AB living trust, estate tax would have been owed on $8 million. In this way, forming an AB living trust can save hundreds of thousands of dollars in estate tax, which can be passed on to beneficiaries. This is made possible by distributing assets between two living trusts, although both can be managed by one person after the death of one spouse. Since ownership of the assets in one portion of the AB California living trust is never officially transferred to the second spouse, estate tax exemption is essentially doubled.
An additional benefit of the AB living trust is that, for example, if the spouse who owns trust A dies, and trust A accumulates interest or otherwise increases before the second spouse dies, estate tax cannot be collected again on trust A, even if its worth exceeds the estate tax exemption limit. This is because the contents of each portion of an AB living trust can only be taxed once, when the owner dies. In other words, if a husband dies significantly earlier than a wife, and his assets in trust A continue to grow after paying any estate tax required at the time of his death, trust A cannot be taxed again at the time of his wife’s death.
Establishing a California AB living trust can also help couples with significant assets reduce their estate tax rate. An AB living trust is especially helpful in cases where each spouse owns an unequal amount of property. This is because your estate tax rate will increase based on the size of your estate. For example, if a wife owns $10 million dollars worth of property and her husband owns $2 million dollars worth of property, a skilled San Diego living trust lawyer can create AB provisions that will equalize what each spouse owns. In this way, when both die, their family will pay less in estate taxes, since the rate for a trust containing $6 million is lower than the rate for a trust containing $10 million. Talk to your living trust lawyer about how equalization of your assets can help your family reduce estate taxes.
Disadvantages of a California AB Living Trust
Although the advantage of reducing estate tax is considerable and may overshadow many disadvantages of a California AB living trust, it is still important to fully understand your options before making a choice.
First, operating an AB living trust requires that the surviving spouse deal with some accounting hassles and as he or she transfers property with a specific recipient to the correct beneficiary, and leaves remaining property in the A or B trust, which he or she now controls according to parameters and restrictions determined when the living trust was created. A surviving spouse may also encounter difficulties in altering or moving assets left in the trust of the deceased spouse. However, with the assistance of a San Diego living trust law firm, these hassles and formalities can become insignificant.
Another potential disadvantage of establishing a California AB living trust is that AB provisions can make it more difficult to leave inheritance to someone other than your spouse. For example if you wish to leave the majority of your money to a charity, it makes little sense to establish an AB living trust, since you do not need to keep assets in the family until the death of your spouse.
Attaching AB provisions to your San Diego living trust can cause problems for young couples. For example, if you and your spouse are in your 40s and one of you passes away, it makes little sense to leave half of your assets in a trust. It may be more practical to leave all assets to the surviving spouse for his or her immediate use, since it is likely to be a long time before he or she has to think about protection from estate tax. It is likely that there will also be economic shifts within the lifespan of the surviving spouse, that will likely require an entirely remodeled estate plan.
You may encounter family disagreements if you establish a California AB living trust. For example, if beneficiaries are children from several marriages, tension and competition over inheritance may ensue. Before attaching AB provisions to your AB living trust, discuss the matter thoroughly with all individuals who will be impacted, ensuring that everyone understands and supports the decision. You will also require professional assistance in presenting the terms of your California living trust as clearly as possible to prevent confusion, misinterpretation, and conflict.
Your San Diego living trust lawyer can explore the unique situation if your estate in order to advise you whether establishing AB provisions is right for you and your spouse or partner.
A surviving spouse or partner can choose how much property he or she wants to inherit from a deceased spouse. For example, if a husband dies, the wife can choose what she will directly inherit, and can place remaining assets in his portion of the San Diego living trust. This is called disclaiming inheritance, and it allows the wife to control how much property enters each half of the trust, so she can keep the amount below the legal limit for estate tax exemption. When one spouse dies and leaves most of his or her property to the surviving spouse, whatever is disclaimed by the surviving spouse is transferred to the deceased spouse’s portion of the California AB living trust. Talk to your living trust attorney about how disclaiming property can help your family reduce estate tax.
You can also use a “formula clause” to reduce estate tax, which can be set up by a California living trust lawyer and an accountant. A formula clause dictates in legal language that only the amount exempt from estate tax will be placed in the part of the living trust that belongs to the first spouse to die.
For example, if the legal amount exempt from estate tax is $5 million, a formula clause will ensure that exactly $5 million is placed in the trust of the first spouse to die. This formula ensures that the surviving spouse will not have to pay any estate tax when his or her husband or wife dies. It is ideal for those whose estates are small enough to avoid paying any estate tax, or for those who do not wish to pay any estate tax until both spouses have died. A formula clause is also ideal if one spouse dies significantly before the other. You can protect a portion of your estate, while keeping the rest free for the surviving spouse to use, and to potentially grow through investment. Talk to your San Diego living trust lawyer about the formula clause, since it can be incorporated into your estate planning after one spouse dies.
Keep in mind that incorporating a formula clause into your California AB living trust is not ideal if you plan to put an amount that is smaller than the tax exempt limit in the trust of the deceased spouse; it does not provide flexibility in this regard. Your California living trust lawyer will be able to advise you if incorporating a clause with your living trust will benefit you and your beneficiaries and help you avoid estate tax.