How to Manage the A-B Trust?
The A-B Trust – The trustee is appointed in accordance with the terms of the trust agreement upon the passing of the husband or wife. Since the husband and wife are typically the first trustees, the sole trusteeship usually passes to the survivor when the first trustee passes away. The surviving spouse must be listed as the new sole trustee on all of the existing assets. In order to properly register the assets, they would need to be labeled as “Ann B. Smith, Trustee of the John A. Smith and Ann B. Smith Trust, dated September 1, 2003-Trust A” and “Ann B. Smith, Trustee of the John A. Smith and Ann B. Smith Trust, dated September 1, 2003-Trust B.”
Regarding Trust A
Trust A remains as a revocable trust for the balance of the survivor’s life and is entirely managed by the survivor. He or she has the power to withdraw any assets, alter Trust A’s terms, choose how much or how little of the trust’s income and principal to receive, and even completely revoke the trust. There is no need to file a trust income tax return because the survivor declares all income, capital gains or losses, and deductions on his or her personal tax return.
Regarding Trust B
The assets of the decedent are held in Trust B, which is now an irrevocable trust. The single trustee of this trust is often the survivor, who has control over the trust’s assets, income, and sporadically the principle amount. However, the survivor is not permitted to revoke the trust or alter its terms or beneficiaries.
Unlike Trust A, Trust B requires its trustee to get a federal tax ID number in order to file an annual fiduciary income tax return. Any income generated by the trust, including interest, dividends, and net profits, is paid to the survivor, who must pay taxes on them even though the trust itself is not. The trust pays taxes on capital gains and typically keeps them.
Although the survivor does not have complete control over Trust B, in the event of an emergency or if the “A trust” is insufficient to cover the survivor’s maintenance, support, and expenses, the survivor may withdraw a portion of the principal. If the money are withdrawn and not used for the objectives stated, the beneficiaries of Trust B’s assets upon its termination may complain, and the survivor may be required to justify the need.
Utilization of Trusts A and B
The surviving spouse typically serves as the only trustee of the two trusts established upon the passing of the first spouse. In this capacity, he or she is free to sell or buy assets for either trust, take whatever distributions from Trust A are necessary, and take any or all income from Trust B. The survivor may also take the principal of Trust B if there is a clearly expressed need. There are some records that must be maintained for Trust B, which must file an annual income tax return, but none are mandated by law for Trust A.
A yearly accounting of all income and outlays from the “B trust” is required by individuals who would inherit the assets from Trust B after it expires, but Trust A is exempt from this requirement.
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