Is the “A-B” Trust Split on the First Death DOA (Dead on Arrival)?

Is the By-Pass Trust a Thing of the Past?

I recently read an informative article which indicated that the need to provide for the “B” or by-pass trust on the death of the first spouse might be a thing of the past for all but the super rich. (Their definition of super rich is a combined estate in excess of $10.5 million).

Personal Lifetime Exemption from Estate Taxes

Income TaxesMost readers know that the personal lifetime exemption from estate taxes is now $5.25 million dollars for each spouse, and it is subject to annual modification for inflation. But don’t “bet the farm” on the fact that Congress, in its infamous knowledge and wisdom, won’t reduce that at some time in the future.

Since the exemption stands at $5.25 million per person now, the author stated you could just leave everything to the surviving spouse in his or her “A” trust, if you felt the entire estate would not exceed $10.50 million. This would avoid the need to file annual tax returns and report the pass through of the ordinary income to the surviving spouse. Also, if the surviving spouse sold assets during her/his remaining life time she/he would report the gain which occurred after the death of the first spouse on her/his return at capital gain rates.

Estate Tax Return Needed

The one VERY important point made in the article is the fact that the surviving spouse would NOT get to use the exemption of the first spouse, under the new portability regulations, unless an estate tax return is filed on the first death, even though no taxes would be owed with the return.

Why Fund the By-Pass “B” Trust?

So with portability, the question is why bother to fund the by-pass “B” trust on the death of the first spouse if you don’t anticipate the combined assets to grow to more than $10.50 million? I’ll give you two VERY important reasons. (And please understand I have been involved in estate and financial planning for 50 years.)

2 Reasons to File the “B” Trust

  1. Assets that are in the survivor’s “A” trust in excess of the surviving spouse’s exemption amount on death will be taxed if an estate return was not filed on the first death; but assets in the “B” trust will not.
  2. If you don’t fund the by-pass “B” trust on the first spouse’s death, and earmark that portion of the estate for the children of the marriage (beneficiaries), you have NO guarantee that those children will ultimately wind up with at least half of the estate, because the surviving spouse can, and may, choose different beneficiaries to receive the balance of all the assets which will be in the “A” trust on his or her death.

Forewarned is Forearmed

I know many readers will tell you they have a very good marriage and a clear understanding of their goals, objectives and intentions. But life is full of unexpected events, and the road to hell is paved with good intentions. Also, there are a lot of elderly gentlemen (and yes, some ladies too) who have enjoyed the wealth and efforts of their partner’s deceased spouse who worked many long years to build an estate.

You should think long and hard before you elect to eliminate the use of a by-pass “B” trust in your estate plan.

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