Unmarried and Same-Sex Couples.
While the portability provisions of the new tax law allow a surviving spouse to use a deceased spouse’s unused estate tax exemption amount, the same federal rules do not apply to unmarried and same-sex couples, regardless of that couples status under state laws granting spousal rights in the event of common law marriage, same-sex marriage or domestic partnership. If you fall into one of these categories and leaving everything to your partner would elevate the value of your partner’s estate above the estate tax exclusion amount, which is currently $5 million, an A/B Trust is a viable way to make sure that your own estate tax exclusion amount is captured while still allowing your partner access to the funds for health, education, maintenance and support.
As the divorce rate continues to rise in this country, so too does the incidence of remarriage. While these second and third marriages can bless our clients with comfort and happiness in their later years, many of our clients worry that if they die before their new spouse their entire estate will transfer to their new spouse and our client’s children will be put at risk of being left nothing in favor of the new spouse’s family. If this is a concern of yours, then one way to ensure that your children are provided for is the A/B Trust. If you die before your spouse, your separate property and your one-half (1/2) share of the community property of the Trust Estate is set aside in an irrevocable trust, typically called the “B Trust” or “Decedent’s Trust”. By properly drafting the language governing the administration and distribution of the Decedent’s Trust you can direct how much of the Decedent’s Trust remains accessible by your surviving spouse for his or her needs, and can direct when and how the remaining Decedent’s Trust assets will be distributed to your children.
One thing that the standard revocable living trust does not offer is protection from a Settlor’s creditors. During the lifetime of a married couple, or in the event that the surviving spouse retains complete control over the entire estate after the death of the first spouse, the power to amend and revoke the trust and to withdraw the income and principal of the trust at any time for any purpose remains with the couple or surviving spouse. This allows creditors the ability to attach claims to the Trust Estate and demand immediate payment. A Decedent’s Trust, on the other hand, limits distribution to the health, education, maintenance and support needs of a beneficiary and states that these distributions are to be made in the discretion of the Trustee. These restrictions, while sometimes a nuisance, do offer the benefit of protection from creditors, at least while the assets are held in the trust. Since the trust irrevocably holds the funds, and the Trustee is given complete discretion to withhold funds, a creditor cannot attach a claim for immediate reimbursement to these assets. If a surviving spouse or child gets into credit difficulty, the creditor cannot demand immediate payment. A creditor can obtain a money judgment payable once the money is actually distributed, but only above what is necessary for the education and support of the beneficiary. Further, if a beneficiary gets into financial trouble prior to the death of the Settlor, the beneficiary can disclaim his or her interest, allowing the funds to pass directly to the residual beneficiaries without being subject to any claims by a creditor.