Who allocates assets in an a/b/ trust? Attorney or CPA? What is the procedure?
First, for other "readers" out there, an "a/b" trust is a will that provides for a distribution to:
- A by pass trust (which uses the $2 million current federal exclusion, or a lower amount to avoid estate taxes to fund a trust that will be available to the surviving spouse, but not taxed in his or her estate; and
- A marital bequest which can be out right with no trust to the surviving spouse; to a marital trust such as Qualified Terminal Interest Property Trust ("QTIP"), or a Qualified Domestic Trust ("QDOT") if the surviving spouse is a non-citizen. There are other options but the key is that this bequest qualifies for a marital deduction to avoid estate tax on this portion of the estate on the death of the first spouse.
As to who allocates assets between the two trusts, it really should be a team approach including not just the accountant for the estate and the estate's probate attorney, but perhaps corporate counsel and investment advisers as well. There are a myriad of issues that can be relevant to making the decision as to which assets are best in which trust. The following is only a partial listing:
- How is the funding of the trust structured in the will. For example, if the by pass trust is funded under a pecuniary formula and assets have appreciated between the date of death and the funding, an income tax cost may be incurred on funding.
- Who are the current beneficiaries of the different trusts? For example, in some plans the surviving spouse is the only current beneficiary of both trusts. In some, the surviving spouse, children and others may all be beneficiaries of the by pass trust. So, for example, if the children are beneficiaries of the by pass trust and certain assets should be made available to them or for their benefit, those assets should be used to fund the by pass trust. Another example, if the family home is in the estate, it might be best to fund it to the QTIP trust to assure that only the surviving spouse has access to it if other persons, especially children from a prior marriage, are named beneficiaries of the by pass trust.
- Who are the remainder beneficiaries of each trust? If different people will receive assets on the death of the second spouse, than those assets should be distributed into the trust which will be appropriate for them.
- Which assets are most likely to appreciate? Since appreciation in assets in a by pass trust will be outside of the surviving spouse's estate the assets with the greatest appreciation potential could be funded to the by pass trust.
- Who are the trustees of each trust? If different trustees are named there may be an advantage to transferring assets to the trusts so that the trustees best suited to manage those assets have those assets in their trust.
- State income taxes may be an issue. If, for example, the estate has a real estate or business asset that will generate income taxable in a particular state, it might be possible to segregate all of those assets in one trust, and manage the second trust in a manner that avoids state taxation. For example, real estate in state A may be put solely into the by pass trust which will remain taxable in high taxing State A. Securities only may be transferred to the other trust. The trustees of the second trust receiving only securities that reside in State A may reside so that there are no longer any connections of that trust to high taxing State A. The savings over time can be significant.
There could be a myriad of other factors to consider. So the best answer is involve all your professionals.