Marital Trusts: Old Provisions for Future Problems

If you're married (or were married) and your revocable living trust was drafted before approximately 2012, it may contain an “A/B Trust” structure (also called a “marital trust,” “credit shelter trust,” or “bypass trust”) that was designed to minimize federal estate taxes. Changes in federal tax law have made these provisions unnecessary for most families, and leaving them in place can create unintended complications. Here are some ways to tell if you might have some marital trust provisions that might be outdated that might add unnecessary complications to your trust:

Step 1: Look at What Happens at the First Spouse’s Death

Locate the section of your trust that describes what occurs when the first spouse dies. A/B trust language will split the trust estate into two separate shares or sub-trusts. Watch for:

•     Trust “A” and Trust “B” — the document literally labels or names two trusts created at death

•     “Survivor’s Trust” and “Decedent’s Trust” (or “Family Trust” or “Credit Shelter Trust”)

•     Language directing the trustee to divide the estate into two shares upon the death of the first spouse

•     References to the “federal estate tax exemption,” “unified credit,” or “credit shelter amount” as the measure for how the split is calculated

Step 2: Check the Surviving Spouse’s Access to the “B” Trust

The hallmark of an A/B structure is that the surviving spouse does “not” have full control over the “B” (bypass/credit shelter) portion. Look for:

•     Income-only rights — the survivor receives income from the B Trust but cannot freely spend the principal

•     A “ascertainable standard” for principal distributions (health, education, maintenance, and support — often abbreviated “HEMS”)

•     Restrictions on the surviving spouse’s ability to change beneficiaries of the B Trust

•     A separate trustee or co-trustee required for the B Trust after the first death

Step 3: Scan for Key Terms and Phrases

The following words and phrases are strong indicators that your trust contains A/B provisions:

•     “Bypass trust,” “credit shelter trust,” or “exemption trust”

•     “Marital deduction” or “QTIP” (Qualified Terminable Interest Property)

•     “Fund the B Trust” or “funding formula”

•     “Pecuniary bequest” or “fractional share formula” tied to the estate tax exemption

•     “Generation-skipping transfer” (GST) exemption allocation at the first death

Not To Be Dramatic, BUT . . .

If you were married and your spouse has passed away, you might already have some pretty serious problems if you have one of these trusts and you haven't properly administered it. I don't want to throw around a term like "breach of fiduciary duty", but some of those trusts might have required you to do accountings and create separate accounts that you might not have realized. The longer you wait to correct those mistakes, the more costly it might be to do so. I’ve litigated these types of cases to the tune of tens of thousands of dollars that took years and caused irrevocable harm to families where the root cause was, probably, lack of education as opposed to ill-intent.

What You Should Do

Don’t panic. If you recognize any of the above signs in your trust document, contact us to review whether your trust should be updated. A trust restatement can modernize and simplify the plan to reflect current law while preserving your original intent. Your current trust with marital trust provisions probably isn’t “wrong” (and your previous attorney might not be “a #$%&”), but the law change in 2010 might allow you to make administration of your trust much simpler. By simplifying your trust, you could cut down on the time and effort your successor trustees need to expound. Furthermore, simplifying your trust reduces the risk of misunderstandings and misinterpretations that could cause needless litigation in the future.