We receive a lot of questions about what, if any administration is needed for a Living Trust after one spouse has died. A lot of the older trusts will have been created with credit shelter, or A-B provisions. An A-B Trust REQUIRES the administrative division of the trust assets upon the death of the first spouse.
As a simplified statement, an A-B or A-B-C Trust is designed, in part, to maximize the total amount of the estate that will ultimately pass to the intended beneficiaries, by minimizing the impact of estate taxes, and secondly to protect the wishes of both spouses as it relates to the ultimate beneficiaries, regardless of which spouse dies first.
When the first spouse dies when this type of trust is in place, then the decedents share (usually one-half) of the trust estate may still be available for the needs of the surviving spouse, but only within certain specific limits and purposes. Beyond that the decedents share (TRUST B) is irrevocable in terms of the ability to change any of its terms. The survivors share is still amendable and revocable by the surviving spouse.
If the surviving spouse does not undertake the administrative A-B Division after the first death, then for all intents and purposes, the entire trust will be rendered irrevocable. The reason being, if you haven't divided the trust assets (allocating specific assets to trust A and Trust B, respectively, then there is no way to know to which set of assets a surviving spouse amendment would apply.
There is no statutory deadline on how long you have to complete the division, but it should be done within 6 to 9 months after the first death. The longer you wait, the harder it is to create an accurate snapshot of the estate at the first death and some form of detailed forensic accounting may be required to analyze how assets were used, invested and spent since the date of the first death. Also if the surviving spouse received actual benefit in excess of the specified limits associated with the B Trust, then there may be other problems to overcome and you may lose some of your otherwise available tax benefits.
If you happen to come across a situation where a spouse has died and the trust is an A-Marital or disclaimer style, then there is a hard limit of 9 months for the surviving spouse to decide whether to exercise a qualified disclaimer, if warranted for tax reasons, to create and fund the Decedents B Trust. An A-Marital Trust, aka Disclaimer Trust is a marital trust whereby at the death of the first spouse, the entire decedent's share will pass entirely in trust to the surviving spouse, (effectively all trust assets being part of the Survivors A-Trust), UNLESS, the surviving spouse shall disclaim, in writing any or all of the decedents share of trust assets. Then upon disclaimer, the surviving spouse would establish and fund the credit shelter, or “B” Trust.
The new Estate and Gift Tax law passed at the end of 2010, created a new dynamic related to the A-Marital/ Disclaimer type trust. Under the new law, if one spouse dies after 2010, then to the extent that the deceased spouse does not use his or her newly updated $5 million (in effect for 2011 and 2012), then the remainder of the decedent's exemption can be added to the surviving spouses exemption (even if the trust is not formally divided into an A and B Trust). This new feature is known as “Portability”. In order to “claim” the portability of the deceased spouses unused exemption, the surviving spouse would have to file an estate tax return and portability election for the deceased spouse. Of course we don't know if this provision will be maintained in the law beyond 2012.