Benefits of an A-B Trust for a Husband and Wife
A married couple has many reasons to establish a living trust. A living trust can help their estate survive onerous estate taxes, avoid probate if they both die, and side step the need for a conservatorship if either one (or both) become incapacitated.
While California and Arizona have eliminated the Inheritance Tax, the Federal Government retains the "United States Estate Tax," popularly called the "death tax." This tax, based on assets owned at the time of death, is still in effect, although any assets passing to a surviving spouse who is a US citizen are exempt. While every individual has an exemption and can pass much or all of their estate tax free (depending on the size of the estate), any amounts above the exemption amount may be taxed at up to 55 percent.
There is no tax on the assets left to the surviving spouse if the husband and wife leave everything to each other and the survivor is a US citizen. When the second spouse dies and the assets are passed to children or other heirs, they are subject to tax if the assets exceed the current tax exemption. If an A-B trust is used, the first spouse to die can set aside their individual exemption amount in an irrevocable trust (known as the B-Trust), as can the surviving spouse. Between the two, some or all of the estate can be passed to their heirs tax free, twice the amount possible if no A-B Trust is in effect.
The probate process, which is a legal proceeding intended to validate someone's will and designate who should receive the assets, can take nine to eighteen painful months to settle. In the end, an "executor" is appointed by the court whose job it is to handle the assets and administer the estate. The executor's fees, as well as those of the attorney and the Court, are determined by law and are based on a percent of the value of the assets. Attorney's fees usually amount to 3-4% of the estate's total value, and a similar amount is also paid the the executor or administrator for his or her services.
Joint tenancy of the assets can eliminate the probate process and will let them pass to the survivor with no legal procedures. While this works very well for a husband and wife, if other people such as children are involved, difficulties can arise if the child becomes bankrupt or defaults on his debts, since the assets can be claimed by creditors.
Probate problems can be avoided by use of a living trust, where a trustee manages the assets in accordance with a written trust agreement that is in effect until the trust ends. If a member of the trust dies, the trust survives, and a new trustee is named if the trustee dies. A properly executed and funded living trust will avoid probate even if both spouses die.
If all the assets are held by someone who becomes incapacitated and no living trust exists, a conservatorship of the estate may be required. This legal proceeding is much like a probate, and usually results large court costs and attorney fees. The possibility of such a conservatorship can be eliminated if there's a living trust. The assets covered by the trust are managed by a trustee, and no court intervention occurs. If the trustee becomes incapacitated or dies, a new trustee who is named in the trust assumes control of the assets.
A couple with no living trust and $2,000,000 in assets would have no estate tax or probate costs when the first spouse dies. On the death of the surviving spouse who now owns the entire estate, a probate court administration will need to be started, and statutory probate fees of approximately $66,000 will apply, along with other court costs. In this situation, a living trust would avoid all of the probate costs. While legal and accounting advice would be required to administer and distribute the trust upon death, trust administration fees are generally just a few thousand dollars.