Looking after your children is one of the most important and challenging jobs for many parents. Perhaps even more so when the parents remarry, bringing children from previous marriages into the family unit. The parents may lean towards trying to share the estate equally when updating the plan to accommodate the new family unit, but this is often not realistic. For example, a family business or vacation home that goes back generations may need to go to one side of the family. If you remarry later in life, older children may have concerns that your new spouse will have the ability to take control of the entire estate if you die. This in itself may not be bad, but it could be disastrous if the surviving spouse passes the estate only to their children or perhaps their new spouse if they remarry.
A-B trusts often useful
Estate planners often recommend revocable A-B trusts to parents with blended families looking to minimize estate tax obligations and limit the surviving spouse’s control of the assets. This living trust sets up varying contingencies depending upon which spouse passes away first. Upon the death of one of the spouses, this trust splits into a survivor’s portion and a bypass portion:
- Trust A holds the surviving spouse’s individual assets and half the community or shared property.
- Trust B holds the deceased’s individual assets and half the shared community or shared property.
How it works
This arrangement enables the surviving spouse to maintain control of Trust A but limits their control of Trust B, although they may still draw income from the trust and enjoy access to assets like a home if it is stipulated. Trust B can shift the maximum exemption allowed into an irrevocable trust. They can shift the remaining amount into the A trust, but taxes will not be due until the surviving spouse’s death. Moreover, any unused portions of the Trust B tax exemption can be transferred to Trust A. If the value of the surviving spouse’s estate is under the tax exemption status, there may be no need to establish a survivor’s trust. Upon the surviving spouse’s death, the trust’s property passes tax-free to the beneficiaries.
Thorough planning minimizes stress and mistakes
Some may feel that this level of planning is unnecessary, but family dynamics can change over time, particularly after the death of a parent. This approach also accommodates financial planning that minimizes financial waste. By addressing these concerns and others, families have peace of mind in knowing that the trust addresses their specific needs.