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Married couples need to take a special look at their estate plan to determine whether any changes may be necessary due to the current (2001) estate tax law.  Specifically, clients who have an "AB" or "ABC" Living Trust should review their Living Trust to determine whether any revisions may be required to achieve their estate planning goals.  Married clients with a so-called "A" Living Trust probably do not need to revise their estate plan.

You should first determine whether you have an "AB" or "ABC" Living Trust. If you are not sure, please click here.

There are generally two situations where your "AB" or "ABC" Living Trust may need to be revised:

First, some estate plans are designed to split into two shares--commonly known as the Survivor's Share (Trust 'A') and the Bypass Share (Trust 'B')--following the death of the first spouse to die.  Some plans split into three shares--commonly known as the Survivor's Share (Trust 'A'), the Bypass Share (Trust 'B'), and the QTIP share (Trust 'C')-- following the death of the first to die.  There are generally two reasons for establishing such a plan (and either or both may apply to you):

One, either spouse may want to ensure that his or her surviving spouse receives a lifetime benefit from the entire marital estate, but also wants to ensure that specific individuals receive the remaining trust property upon the death of the second to die.  In this instance, there is no tax purpose for the split, thus it is likely that no change is required due to the new tax law.

Two, some estate plans are designed to split into two shares upon the first to die in order to double federal estate tax exemption equivalent.  In this case, some trusts use a formula that will require the trust to split into two (or three) shares, regardless of the current federal estate tax exemption equivalent.  However, an estate that would require a split to avoid estate tax under the former law may now, under the new tax law, not need to split to avoid estate tax, but may still be forced to split per the terms of the trust.  Accordingly, if your only reason for an "AB" or "ABC" Living Trust is to minimize estate taxes, you may want to consider amending your "AB" or "ABC" trust to a so-called "A" Living Trust.  An "A" Living Trust generally still contains "B" Trust provisions so as to allow a couple to minimize estate taxes, but allows the decision as to whether to split the trust, and the amount to be allocated to the "B" Trust, to be made by the surviving spouse within nine months of the death of the first to die.  This technique allows more flexibility and still achieves the same tax savings regardless of future changes to the estate tax law.   However, this type of trust also opens the door for surviving spouse to unilaterally change the final estate distribution plan, thus leaving open the possibility that the intended beneficiaries of the first to die could be eliminated from the estate plan.  Thus, married clients who have a solely tax motivated "AB" or "ABC" Living Trust may want to consider reviewing their Estate Plan to determine whether other options may now be more appropriate.

Second, some estate plans establish shares for different beneficiaries based upon application of a formula which is linked to the amount of the federal estate tax exemption equivalent.  For example, an amount equal to the exemption equivalent might be set aside to benefit children from a prior marriage, with amounts in excess of that amount going to benefit the surviving spouse.  Over the next few years the amount of the exemption equivalent will rise significantly, until the estate tax is repealed in 2010, and then it will drop to $1,000,000 in 2011.  Clearly any plan which distinguishes between beneficiaries (or groups of beneficiaries) based on a tax-exemption-related formula will have to be carefully considered in light of the current law.

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Kenneth S. Jacobs                          
Attorney at Law
Certified Specialist
Estate Planning, Trust & Probate Law
State Bar of California Board of Legal Specialization
117 N. Main Street.  Sebastopol, CA 95472
(707) 829-7303   info@kenjacobs.com