Law Offices of Joan Grimes

Do You Still Have an AB or ByPass Trust?

Up until 2011, it was very common for estate planning attorneys to draft an AB or ByPass Trust for clients. The purpose of the AB/ByPass Trust was to create estate tax savings by keeping a deceased spouse’s property out of the estate of the surviving spouse.
However in 2011, federal estate tax laws were changed dramatically to exempt most estates from paying any estate taxes. For 2016, the exemption for each person is $5.45 million. The amount will go up each year based on a “cost of living” increase. In addition, under the rule change called “Portability”, a surviving spouse may use any unused portion of a deceased spouse’s estate tax exemption upon filing a 706 tax return. For example, a couple has an estate of $7 million. The husband dies, leaving his wife with an estate of $7 million. There is no estate tax due because wife takes all property by way of the marital deduction (which is unlimited). Because husband’s personal exemption of $5.45 was not used, the wife can add his $5.45 to her exemption at the time of her death by filing a 706 tax form.
The personal exemption and portability have meant that very, very few people will pay any estate tax. Therefore, the traditional AB Trust is no longer necessary or useful for most people. That is not to say that there is anything wrong in keeping an existing AB Trust. HOWEVER, there are serious drawbacks which you should be aware. Specifically, (1) with an AB Trust there are restrictions on what a surviving spouse can do with property in the ByPass Trust created with deceased spouse’s assets i.e. making it is difficult to sell assets; (2) with an AB Trust, the surviving spouse cannot make gifts to anyone of the ByPass property and (3) with an AB Trust there can be substantial costs involved in managing the Trust after the death of the first spouse including establishing the ByPass trust, preparing the trust tax return each year and record keeping to ensure that the property in ByPass Trust is kept separate from the surviving spouse’s assets.
In most cases, an AB/ByPassTrust is no longer necessary or advisable for estate planning. If you have not looked at your Trust recently, I strongly encourage you to review it and see whether it provides for an AB Trust. If it does provide for an AB/ByPass Trust, I would encourage you to seek legal counsel to see whether it may be in your best interest to amend or restate the Trust to remove the AB Trust provisions. If you have any questions regarding an existing Trust, I see people every day for a FREE 30 minute consultation in Walnut Creek and Brentwood.
This article provides only general legal information, and not specific legal advice. Information contained is not a substitute for a personal consultation with an attorney. © 2017 Joan Grimes.
Law Offices of Joan Grimes can be reached at 925-939-1680 or visit www. lawofficeofjoangrimes.com. Offices in Brentwood & Walnut Creek.