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RULES OF THUMB and conventional wisdom often serve us well. But we should make sure they’re truly applicable to our situation.
Like many parents, my wife and I prepared our first estate planning documents when our children were young. The estate planning lawyer suggested a so-called AB trust. If we’d taken his advice, when one of us passed away, half of our joint assets would have gone into an irrevocable trust. The surviving spouse would get the income from that trust, but in most cases wouldn’t have access to the principal. When the surviving spouse died, the money in the trust would be distributed in accordance with the wishes of the first person who passed away.
My parents had this type of trust. There are good reasons for using it. Let’s assume the husband dies first. He may want his estate to go to his children when his wife dies. If he doesn’t have such a trust and leaves everything to his wife, she may not leave everything to their children. Suppose she remarries. She might opt to leave everything to her new spouse, so nothing ends up going to the children.
This happened to a woman I know. She was an only child and grew up on a family farm. Her mom died first. Mom’s share of the farm went to her husband. Dad remarried. He died. The farm went to the new wife. The new wife died. She had no will. Under state intestacy laws, the family farm went to the children of the new wife. My friend got nothing. This is probably not what my friend’s mom wanted. An AB trust would have prevented this outcome.
Still, when the lawyer encouraged us to use an AB trust, my wife and I balked. Why? At the time, our four children ranged from ages five to 12. When one of us died, they would have been guaranteed to eventually receive half of our estate. But would we want that if, say, one of our children was a drug addict or in jail? Hopefully, that wouldn’t be the case, but there were no guarantees.
The upshot: We told our lawyer that, when one of us died, we wanted that person’s estate to go to the surviving spouse. My wife and I agreed that, in the event one of us died early, the surviving spouse shouldn’t inadvertently leave everything to a new spouse and mistakenly cut out our children. The lawyer was uncomfortable with our plan. He finally agreed to prepare the documents the way we requested—without the AB trust—but insisted on us signing a statement that we were doing this against his advice. We think he was afraid a disgruntled child would one day sue him.
Happily, years later, none of our children is a drug addict or in prison and neither of us died early—but my wife and I are still sticking with our original plan: When the first of us dies, we’re trusting the other to leave our remaining assets to our children.
One thing about these types of trusts is that you will spend a lot of money on lawyers and accountants. The trust must file a 1041 every year, and accountants delight in charging high prices for these.
I would suggest that the cost isn’t really worth it unless the trust is at least $3 million.
An uncle had an A/B trust. His wife died, leaving a five-year-old daughter. He remarried several years later. His daughter eventually married and had twins, naming one for her mother and one for her stepmother. His daughter died in an accident, shortly after filing for divorce on grounds of desertion. She was intestate, so her share of trust is split between the twins and her absent husband. The twins live with my uncle and his wife. Their father made an attempt to get his share of trust proceeds early, then disappeared again when he discovered that he can’t touch it until my uncle’s death.
My uncle is resigned to the knowledge that his son-in-law will eventually benefit from proceeds of the trust. He and his first wife had great intentions with that A/B trust, but they didn’t anticipate the events of the next thirty years. When his lawyer pointed out that he has substantial assets and suggested another trust, my uncle said he had experience with the dead man’s hand and would let the living make mistakes without his interference from the grave.
Ginger, thanks for posting. A very sad situation. Your uncle’s predicament is a good lesson on why the conventional wisdom is not always appropriate.