There are two ways to write a trust. You can put it in your will and the trust only takes effect after you die. The other way is to create a living trust and put your property into the trust while you are alive. Usually the living trust is revocable which means that you can withdraw a portion or even all of the trust property while both you and your spouse are alive. The principal difference between a testamentary trust (trust in a will) and a living trust is that a living trust will avoid probate expenses and a testamentary trust will not.
Substantial death tax savings can result from the use of an estate planning trust. This type of trust is usually called the A-B trust. The A-B trust can be the testamentary type or a living trust. For example, a husband and wife have an estate of $10,900,000. They create a trust. In this case husband and wife are creators, trustees and beneficiaries. During their lifetimes, the trust is revocable meaning it can be canceled. If the husband dies, then the trust becomes irrevocable meaning that it cannot be canceled. The A trust is the wife's one half of the property. The wife receives all the income from the A trust and can even withdraw principal if she desires. The B trust (the husband's one half of the community ) usually provides that the wife receives the income from the trust but has limited rights to withdraw principal. The wife basically controls all the property in the A trust including deciding who receives all the property in the A trust after she dies. However, the B trust is controlled by the instructions in the trust which was decided by the husband when he was a live. Usually the trust states that the property in the B trust passes to the children upon the death of the wife.
Why are trusts written that way? For tax purposes. If the husband and wife write their trust as above, then the B trust will not be taxed upon the surviving wife's death. (See section on community property). If there had been no trust, when the husband dies, all property would pass to the wife. Her estate would be $10,900,000. There will be no death tax due upon the husband's death because of the special estate tax rules. However, when the wife dies all amounts over $5,450,000 (2016) will be taxed. In this example, $5,450,000 is subject to estate tax. The approximate tax will be $2,000,000. This is a substantial sum of money.
However, with an A-B trust, there will be no tax due. That is a savings of about $2,000,000. Also if the creators made a living trust they will save probate expenses which would be about $300,000 or more. Therefore, the creation of an estate planning trust could save the husband and wife $2,300,000. This means that $2,300,000 will pass to their children which otherwise would have been paid to the Internal Revenue Service and for probate fees.
There are some disadvantages of a trust. After the death of the first spouse, the trust will require separate tax returns.
There will be maintenance costs of the trust including accounting fees, legal fees, and administration fees. However, considering the substantial tax savings, the overall benefit of a trust greatly outweighs the minor disadvantages.