The typical revocable living trust prepared historically in California for a married couple is often called an “AB Marital Trust” or “ABC Marital Trust.” This trust often names the spouses as the Trustors who established the Trust, the Trustees put in charge of trust property, and the Beneficiaries who received the benefit of the Trust. Typically, the Trust provides that upon the death of the first spouse (i.e. the “Deceased Spouse”), the Trust either will be or may be divided into two or more trusts to be administered separately from that day on. One or more of the trusts will for be the benefit of the children of the marriage or other heirs of the Deceased Spouse, while one or more of the trusts will benefit the remaining spouse, or the “Surviving Spouse.”
Whether or not the AB(C) Marital Trust requires a division of the couples’ property into two or more trusts or permits a division depends on how the trust is drafted. Most revocable living trusts drafted in the 1980s and 1990s required the division of the property into two or more trusts after the death of the Deceased Spouse. This was normal at the time, because the federal estate tax exclusion amount for estates was less than $1,000,000 back then, and estate planning was considered appropriate.
What is the “A Trust” in an ABC Marital Trust?
The “A Trust,” or the “Survivor’s Trust,” is established for the Surviving Spouse. It typically contains the one-half of the Community Property owned by the Surviving Spouse of the marriage, plus any separate property owned by the Surviving Spouse. It may also contain property directly received from the Deceased Spouse’s estate. The Survivor’s Trust is “revocable,” so the Surviving Spouse may amend, cancel or modify the terms of the Survivor’s Trust if desired.
What is the “B Trust” in an ABC Marital Trust? The “B Trust” or the “Bypass Trust,” will likely contain the Deceased Spouse’s one-half of the Community Property, plus any separate property owned by the Deceased Spouse. However, the total value of property that can be placed into the Bypass Trust without a federal estate tax is limited to the applicable exclusion amount (“AEA”) of the Deceased Spouse, as determined in the year of the Deceased Spouse’s death. The current AEA (2024) is $13.61 million per individual and will be indexed for inflation in future years until January 1, 2026, when the exclusion will “roll back” to about one-half of the exemption from 2025. The best estimate is that the AEA in 2026 will be between $6.5 million and $7 million.
The property in the Bypass Trust and future appreciation will “bypass” estate taxation in the estate of the Surviving Spouse when the Surviving Spouse dies. However, this will also mean that the “cost basis” of the Bypass Trust property will be fixed at the time of the Deceased Spouse’s death, causing future appreciation to be subject to capital gains taxation when the property is later sold by heirs.
With the higher AEA in effect today, the federal estate tax planning purpose for a Bypass Trust has been largely eliminated for the vast majority of families. At the same time, the loss of an increase in the cost basis of the property in a Bypass Trust can cause income taxation that could be completely avoided if there were no Bypass Trust.
What is the “C Trust” in an ABC Marital Trust?
The “C Trust” or the “Marital QTIP Trust” may contain any property of the Deceased Spouse that is greater than the AEA. The Marital QTIP Trust qualifies for the Unlimited Marital Deduction, which permits the deferral of federal estate taxation until the death of the Surviving Spouse. The Marital QTIP trust may also receive property directly from a Deceased Spouse’s estate to be held of the benefit of the Surviving Spouse, even if there is no “B Trust” ever created. The “C Trust” property is included in the taxable estate of the Surviving Spouse at his or her death.
Because the vast majority of estate plans for married couples are no longer needed for federal estate tax planning purposes, a petition under Probate Code Section 15403 or 15409 can remove the requirement that a Bypass Trust be created. This can then provide the income benefit of an increased in cost basis at the death of the Surviving Spouse, whether property is in an “A Trust” or a “C Trust.”