Dear Len & Rosie,
My father died 10 years ago. My mother is still alive and she has an A/B trust. One of my brothers borrowed a lot of money from Mom and Dad and has never paid it back. Mom wants to change the trust to leave her home to only three of her four children. Mom’s lawyer says she cannot do this. Can you help?
People get confused by what an A/B trust means. You should think of the “A” as standing for the “above-ground” or surviving spouse and the “B” as standing for the “below-ground” or deceased spouse. Your parents created an A/B trust to avoid probate and reduce their estate tax liability. On your father’s death, all or part of his interest in the trust should have been transferred to the B trust, commonly referred to as the “Bypass” or “Exemption” trust.
Because the assets of the B trust are not owned outright by the surviving spouse, they will not be subject to estate tax on your mother’s death. For the B trust to avoid estate tax, it must be an irrevocable trust, and your mother’s right to withdraw trust principal must be restricted. Because this trust is irrevocable, your mother cannot change who gets to inherit the B trust on her death, unless the trust gave your mother a “power of appointment” that she could exercise by creating a new will that directs the trustee to distribute the B trust the way she wants. Most B trusts do not include powers of appointment, because the second reason couples create A/B trusts (besides estate tax avoidance) is to prevent the surviving spouse from disinheriting the deceased spouse’s chosen beneficiaries.
This does not mean your mother can do nothing. While she cannot amend the B trust she can do whatever she wants with the A trust. If she did not complete the administrative process of dividing the trust into its A and B shares after her husband’s death, she could do the A/B split and now may be able to allocate the home entirely into the A trust (usually called the “Survivor’s trust”). Since your mother can fully amend the A trust, she can leave it to three of her four children the way she wants. The B trust may also give her a limited power to invade trust principal, so your mother may be able to move part of the B trust into the A trust on an annual basis.
What your mother ought to do is to review the trust with a trusts and estates attorney who can objectively review the trust and explain to your mother exactly what she can do to change the trust to suit her wishes.
Your letter raises another very important point. On January 1, 2013, the estate tax law was reformed and the amount a person may pass to their loved ones free of estate tax was increased to $5,250,000, with an automatic inflation adjustment. In addition, a surviving spouse can take a deceased spouse’s exemption and pass more than $10,000,000 free of estate tax. Most married couples today do not need an A/B trust any longer to avoid the estate tax and should consider amending their trusts to remove the mandatory A/B split provisions.
Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, Noon-1 p.m. and Sundays, 4-7 p.m. on KGO Radio 810 AM.