9125 / How can an A-B trust be used by individuals in a blended family to plan for inheritances by children from prior marriages?

Planning for wealth transfer in a blended family can become complicated because, without proper planning, a surviving spouse could inherit all of a first-to-die spouse’s assets and gain complete control over how those assets will be distributed upon his or her death. If the first-to-die spouse has children from a first marriage, he or she may prefer that the assets benefit those children, rather than any children (or future children) of the surviving spouse. In the end, many individuals will wish to provide for a surviving spouse during life, but ultimately want to control the distribution of their assets upon the death of that surviving spouse.

In order to accomplish this, many individuals use trusts in order to ensure that a surviving spouse has sufficient income for life, but that the first-to-die spouse’s assets ultimately pass to his or her biological children (rather than to any stepchildren or future spouses of the surviving spouse). Creating what is known as an “A-B trust” (also known as a bypass trust, which were typically created to avoid estate taxes prior to the increase of the federal estate tax exemption and introduction of portability, see Q 9122) can ensure that both the spouse and decedent’s children benefit from a decedent’s estate according to his or her wishes.

The A-B trust can really take many forms, depending upon the parties’ wishes. For example, the decedent can leave a portion of his or her estate in the “A trust”, typically a revocable grantor trust that gives the surviving spouse use of the trust income for life, but often leaves the remainder (trust principal) to the decedent’s children. The “B trust” is an irrevocable trust that would contain a portion of the decedent’s estate to either immediately benefit his or her own children, or to provide income to the surviving spouse with the trust principal preserved for the children (depending upon the wishes of the decedent).

While the surviving spouse may have the ability to modify the beneficiaries of the A trust and retain some control over the principal of that trust (depending upon trust terms), the B trust is irrevocable. In this manner, both the surviving spouse and decedent’s children are protected. Further, the client has ensured that at least a portion of his or her assets will ultimately pass to his or her own children, rather than to stepchildren or as the surviving spouse directs.