As a result of the American Taxpayer Relief Act of 2013, and more recently, the Tax Cuts & Jobs Act of 2018, most couples no longer need to be concerned about federal estate tax. However, if you established an A/B trust prior to 2010, you might want to take steps now to revoke the trust in order to avoid the unnecessary expense and hassle for your family.

An A/B trust is a joint trust created by a married couple for the purpose of minimizing estate taxes upon the death of the surviving spouse. In reality, very few families need this type of arrangement.

Several developments in the law have made A/B trust arrangements less advantageous or necessary. Consider the following:

Increased exemptions for federal estate tax: In 2020, each person can give away or leave $11.58 million without owing tax. This exemption amount is indexed for inflation as well.

Favorable tax breaks for married couples: Wealthy married couples can share their federal estate tax exemptions, which means if they were to pass in 2020, between them they can leave up to $23.16 million with no concern about estate taxes. By comparison, the 2017 exemption was $5.49 million per>person, or $10,980,000 per couple.

Repeal of state estate taxes: Many states have abolished their own estate and inheritance taxes. Currently, only about 20% of states still impose a state estate or inheritance tax. Of the states that still impose the tax, some exempt as much property as the federal government, but some exempt far less. In general, state estate tax rates are significantly lower than the federal rates (for example, PA has a maximum inheritance tax rate of 15% while the federal maximum tax rate is 40%). So, it may no longer be beneficial to create an A/B trust just to avoid state estate taxes.

Marriage equality rulings: Same-sex couples now receive the same federal tax breaks as other married couples. After a U.S. Supreme Court ruling invalidated parts of the federal Defense of Marriage Act in 2013, the IRS indicated that it would treat all legally married couples the same for tax purposes, whether or not a couple lives in a state that recognizes same-sex marriage.

Imposes Burden

If you have an existing A/B trust in place, you may think there is no harm in keeping the trust. After all, your assets will avoid probate and there is no estate tax to be concerned about. But the reality is an A/B trust will likely impose a burden on the surviving spouse due to significant restrictions, required tax filings, irrevocability, lifetime legal responsibilities, and it may trigger capital gains taxes for the beneficiaries after death.

In the typical A/B trust structure, when one spouse dies, the trust is split into two trusts, Trust A and Trust B. One is irrevocable; the surviving spouse cannot change its terms. In other words, the surviving spouse has only limited rights to use the assets that are held in the irrevocable trust. In general, the survivor receives only the income generated by the trust assets.

As mentioned, cost is a potential drawback. After the first spouse dies, the survivor will likely need the services of a lawyer or accountant to determine how best to divide the couple’s assets between the irrevocable trust and the surviving spouse’s revocable living trust. This decision can have significant tax consequences. In addition, the irrevocable trust is a separate, tax-paying entity. The surviving spouse must obtain a taxpayer ID number for it and file an annual trust income tax return, in addition to keeping accurate records for the trust property.

When A/B Trust is Beneficial

There are instances when an A/B Trust structure is beneficial. For example, it can help protect assets from second marriage situations. However for most families, a revocable living trust is likely a more efficient option than a complex A/B trust. A simple revocable living trust is, essentially, a substitute for a will. Trust assets are quickly distributed to the beneficiaries, avoids probate, and because the trust doesn’t stay in existence for years, no trust tax returns are necessary.

Your Janney Financial Advisor, supported by our team of knowledgeable professionals, and your estate planning attorney, can help you decide what’s best for your financial future.

Working with Janney

Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile. 

When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts. 

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By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences. Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

About the author

Jay Guyer

Vice President, Senior Financial Planner

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