• Bryan D. Eisenbise, Esq.

Am I Really Required to Divide and A/B Trust?

This first questions is a common one, and has to do with the fact that the Estate Tax Exclusion amount was so relatively low in the last decade, and is so relatively high right now, and thanks to the Fiscal Cliff "deal," will continue to be higher in perpetuity.  A/B Trusts were a lot more popular when the Exclusion was low, because many clients felt like they were going to be subject to the estate tax.  Now, as these estates are "maturing," the surviving spouse is typically faced with the decision on whether to comply with the trust provisions to divide the trust, even though it will unlikely provide much of a benefit.  There is a short answer to this question, but there is a pretty big caveat, which has to do with the fact that some clients have always created AB Trusts, and will continue to do so for reasons other than tax planning.  Rest assured however, all explanations are pretty simple.

"My client is asking whether she has to divide her A/B Trust and file a 706 Estate Tax Return after her husband's death last year, even though her estate is worth much less than the Estate Tax Exclusion Amount."

Technically, they need to move forward with a formal trust division, and a 706 is part of that formal process.  But, I come across this situation all the time, primarily because back when the exclusion was so low, everyone was getting A/B Trusts, so in situations where they still have an A/B Trust, but it would afford them no tax advantages (nowadays with the exclusion so high), I give them the option of ignoring the requirement to divide the trust (and the associated 706 filing).

However, the A/B Trust requires that they do go through the formal process, so the the surviving spouse (client) could be held liable by the beneficiaries if she does not treat this trust division and 706 filing formally.  But if the children are all on board, I can typically prepare a waiver and settlement the client can get all of her children to sign, which essentially absolves her of any liability....and usually the children agree, because the alternative would be to spend their future inheritance on legal fees to effectuate this unneeded division.

Caveat:  Some clients get an A/B Trust not because of the tax situation, but because there are children from prior marriages that each spouse wants to protect from the other spouse if they were to die first.  For example, John and Mary are married, each with their own children, although they may not have a lot of money, they may still get an AB Trust, so if John dies first, he is assured that Mary cannot take the entire estate and cut our his children.  In this type of situation, if your client (or Mary in this example) refused to divide the trust and pay the associated legal and tax expenses to do so, simply because she "is not subject to the Estate Tax," she can very easily be on the receiving end of a lawsuit from John's children demanding such a division, and could run into a whole host of associated problems.

Bottom line, if your client is not subject to the estate tax, and her and her deceased husband have a close-nit nuclear family, and those children are the only beneficiaries, then my answer would be, "No."  She has other options.  None of which are "by the book," but not of which get her in any trouble either, but save her substantial money, and headaches.  If your client has step children, from this deceased spouse, or if the deceased spouse was providing for beneficiaries other than their children together, doing a formal trust division (with the associated 706) would be a good idea.  Note the 706 shouldn't be complicated at all, since there should be zero tax due.