For decades, estate planners have used a trust to hold the estate tax exclusion of the first spouse to die of a married couple. That trust had various different names: “B Trust,” “Credit Shelter Trust,” “Bypass Trust,” and “Family Trust” are among the more common names. With this A/B planning, the money of the first spouse to die would be transferred into a trust (for the benefit of the spouse and/or children) which was designed to avoid inclusion in the beneficiaries’ estates.
With the “permanent” increase in the estate tax exclusion to $5 million + and the advent of “permanent” portability in 2013, there has been increased debate about the wisdom of this strategy.
While the trust may not be necessary to preserve the estate tax of the pre-deceasing spouse, there are many reasons to consider the use of such a trust:
- The assets in the trust can grow exempt from estate tax. The portable exemption is fixed at the death of the pre-deceasing spouse.
- The state estate tax exemption is almost never portable.
- The GST exemption is not portable.
- The trust may provide re-marriage protection; portability does not.
- The trust may provide creditor protection for the surviving spouse; portability does not.
Some claim that portability is better because the assets passed directly to the survivor get a step-up in basis at the survivor’s death. However, the bypass trust may be drafted in a manner to achieve a step-up in basis at second death, while obtaining the advantages listed above.
Certainly, there are some situations in which a simple plan passing all the assets to the surviving spouse would be appropriate. However, the analysis is not quite as clear-cut as some might suggest.
While the reasons to do A/B planning may have shifted from estate tax savings to a more nuanced and complex analysis, it seems A/B planning may still be the preferred plan in many situations.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
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