The first step is to determine if the Trust is (1) an A-B Mandatory Trust, or (2) A-B Disclaimer Trust. If mandatory, then the A and B Trusts must be funded. This would be so, even if the estate is exempt from estate taxes. Often this A-B Mandatory Trust is chosen in the case where there are children from a prior marriage, or other non-tax reasons. If, for some legitimate reason, the Surviving Spouse does not want or need the B Trust, he would need to seek approval from the family members (beneficiaries) and the Probate Court to revise the Trust. For example, assume the Trust Estate is only $100,000, there is no house, and dad needs this money for living expenses and medical care. With approval of the family, the Probate Judge has discretion to revise the Trust and eliminate the B Trust and its inherent administrative costs (that is, yearly tax filing, legal fees, and accounting fees).
If the Trust is an A-B Disclaimer Trust, the Trustors understand that they MIGHT HAVE THEIR ORIGINAL TRUST DIVIDED into two sub-trusts upon the death of the first spouse, if the surviving spouse disclaims a portion of the estate for estate tax planning purposes. These will be the survivor’s sub-trust (“SURVIVOR’S TRUST A”) and the bypass or disclaimer sub-trust (“DISCLAIMER TRUST B”). Sometimes the B Trust is called Credit Shelter Trust or Family Trust.
If it is created, the DISCLAIMER TRUST typically will hold either: (1) one-half (½) of the community property of our estate, plus one-half (½) of the quasi-community property (if any), plus all of the separate property of the deceased spouse, plus other amounts as specified in the Trust; or (2) the exemption equivalent amount for one spouse ($5,250,000 per spouse in 2013), less any used lifetime gift credits, whichever is less. You must look at your specific Trust language.
It is generally the intent of the Trustors that any of their property that is not disclaimed by the surviving spouse shall pass to the SURVIVOR’S TRUST. Moreover, the SURVIVOR’S TRUST would be REVOCABLE by the surviving spouse, but the DISCLAIMER TRUST would be IRREVOCABLE.
Here are some important facts about an “A-B Disclaimer Trust” election:
1. The surviving spouse must make an election, WITHIN NINE (9) MONTHS AFTER THE DEATH OF THE FIRST SPOUSE, to disclaim or not to disclaim a given portion of the estate.
2. If the surviving spouse CHOOSES TO DISCLAIM a portion of the trust estate, then the DISCLAIMER TRUST will be set up containing assets as disclaimed and allocated by the surviving spouse, with the help of his or her legal and accounting professionals.
3. If the surviving spouse chooses NOT TO DISCLAIM, then all the trust property automatically will be allocated to the SURVIVOR’S TRUST.
4. If the surviving spouse FAILS to make an election WITHIN NINE (9) MONTHS after the death of the first spouse, then the time to make an election will have passed, and the BYPASS TRUST will not be created. Thereafter, the whole estate will be allocated to the SURVIVOR’S TRUST. This would be the same as if the surviving spouse had initially decided not to disclaim.
Here are some SIGNIFICANT RISKS with the A-B Disclaimer Trust:
1. The surviving spouse MIGHT NOT DISCLAIM, whether it is due to insecurity, failure to attend to tax issues on the death of the deceased spouse, inadvertent “acceptance” of transfers from the deceased spouse, using money for personal use from certain accounts that were intended to be disclaimed, or poor professional advice.
2. It is possible that the surviving spouse INTENDS TO DISCLAIM a portion of the trust estate and create the DISCLAIMER TRUST, but HAS NOT COMPLETED the process within the nine-month period.
3. In the meantime, if the surviving spouse EXERCISES CONTROL over certain assets or accounts, this COULD BE DEEMED AN ELECTION to allocate those assets to the SURVIVOR’S TRUST, thereby making the surviving spouse’s later disclaimer ineffective.
RANDALL B. KLOTZ, Esq.
DISCLAIMER: This answer gives partial details for discussion purposes only. It is not intended to be a complete analysis of your legal issue, nor does it create an attorney-client relationship. If you have any questions, you should seek the advice of an attorney in your city or local area.
There is no way to say without reviewing the documents. It may be that the B Trust only needed to be funded, if there was more than the Federal Estate Tax exclusion amount in the trust. If the trust was worth less than that, it may have been completely appropriate to fund only the A Trust.
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I agree with Mr. Frederick that his explanation is the most likely. The fact that you say "1/2" of the estate however gives me pause because usually this type of trust would be funded based on the federal estate tax exemption, state estate tax exemption, or a formula that relates to the estate tax in place at the time. I would take a copy of the trust, if you have it, to an attorney to review and determine what should have been done (or not done) and it certainly would help to know what assets Mom/Dad owned when Mom died.
This is not legal advice nor intended to create an attorney-client relationship. The information provided here is informational in nature only. This attorney may not be licensed in the jurisdiction which you have a question about so the answer could be only general in nature. Visit Steve Zelinger's website: http://www.stevenzelinger.com/
To add to previous answers, however, if the B trust was required to be funded with one half of the community property and all separate property of the decedent (which is very common), then you may have a stale trust situation. You should speak with competent counsel to determine whether the 1st death administration was properly handled, especially if it impacts your inheritance.
THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. The answer to question does not create an attorney-client relationship or otherwise require further consultation. Mrs. Cook is licensed to practice law throughout the state of California with offices in San Diego County. She is authorized to handle IRS matters throughout the United States, and is also licensed to practice before the United States Tax Court. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, please be advised that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used or relied upon, and cannot be used or relied upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.