When a married couple creates an estate plan designed to minimize estate taxes, these plans often involve trusts known as A-B trusts, credit shelter trusts, or bypass trusts. The purpose of these trusts is to set aside a certain amount of trust assets after the first spouse dies, in order to preserve the first spouse’s estate tax exemption amount. Successor trustees of these trusts will be called upon to divide the trust assets into two sub-trusts, the “A” trust and the “B” trust, after the first spouse dies. The “A” trust is sometimes referred to as the marital trust, and the “B” trust is referred to as the bypass trust or the family trust.
5 Tips for Dividing Trust Assets Between Sub-Trusts in an A-B Trust
Dividing the trust assets between the sub-trusts is an important task that requires careful consideration of tax and other consequences. The following are five helpful tips:
- The court is typically not involved in the division of the trust assets between the two sub-trusts.
- The trustee must first obtain the fair market value of all of the trust’s assets. This value is determined as of the death date of the first spouse.
- The terms of the trust dictate how much of the trust assets should be allocated to each sub-trust. This is typically done through a variety of methods, such as by using various types of formulas, disclaimers, or what’s known as a Clayton election.
- The trustee must carefully consider whether the assets will appreciate or depreciate when determining what should be used to fund a sub-trust. Since the assets going to the “B” trust are valued as of the date of death of the first spouse, with no estate tax due on these amounts until the surviving spouse dies, it often makes sense to place higher appreciating assets into the “B” trust.
- The assets can also be split between the two sub-trusts.
Successor trustees are advised to seek assistance from tax advisors and an experienced attorney when dividing assets in a trust into sub-trusts. To learn more, we encourage you to contact us at (714) 459-5481.