Ok, this could be the longest blog in the history of the world I went into all the details about Bypass trust funding. These trusts are also called “B trusts” or “credit shelter trusts” and their use generally comes up when the first spouse dies. Many spouses set up these trusts years ago when their assets were worth more and their estate tax exemptions much less. The questions the surviving spouses ask me include:
“Do I have to do this trust split?”
“What are the advantages of doing it?”
“What could happen to me if I don’t do it?”
“Can I change my mind later?”
“How much will this cost me?”
“What happens if I get remarried?”
The list goes on and on and on. The fact is “to fund or not to fund” is a loaded question and each case has to be looked at in detail.
Today I met with a guy we will call George. His wife recently died and he is struggling after losing his companion of 50 years. His trust is what I call a mandatory A/B/C trust. That is the trust specifically says he “must” split the assets into the three trusts or, in his case, at least two trusts. I advised him to split the assets as the trust dictates and gave him several reasons why it’s important (estate tax law changes, capital gains tax problem, marrying a young woman who might try to fleece him, etc…).
George did not like the idea of separating his assets. I told him, “I can not force you to split the assets. All I can do is tell you what the trust says and what some of the ramifications are if you don’t. That’s really the bottom line. The trust might say you must do something but it’s up to you, as trustee, to take the risk of not following the trust’s mandate. I encouraged George to follow the terms of the trust but in the end it’s his decision.
The problem is the future has so much uncertainty that most people should split their assets… even if the trust is a “disclaimer trust” which gives the surviving spouse the option of splitting the assets into two pots within 9 months of death. Yes there are pros and cons on each side of the equation but in the end trust funding is probably the better way to go for most people that have a trust which splits at the first death.
Also, and this is the really important part… if you and your spouse are both still alive you should have your A/B trust reviewed by an attorney ASAP. A lot of people have the wrong trust based on the changes in tax laws and assets. If you both agree the trust can be modernized and changed so go do it now!