Don't let your kids suffer like Cinderella
It occurred to me while reading Cinderella to my children that Cinderella's suffering could have been avoided. If Cinderella's father had created an A-B Trust when he remarried, he could have protected her inheritance and provided for his widow. Alas, it appears he died without an estate plan, leaving Cinderella to the mercy of her step-mother.
How an A-B Trust Works
An A-B Trust is a valuable estate-planning tool for blended families. When a couple enters into a marriage with children from a prior marriage, an A-B Trust can give everyone peace of mind by providing for the surviving spouse and protecting the step-children's inheritance.
An A-B Trust acts like a regular revocable trust while both spouses are alive. Then, when the first spouse dies, two trusts are created.
Trust A is a survivor's trust for the surviving spouse. Typically, Trust A includes the surviving spouse's separate property and one-half of the community property. Trust A remains a revocable trust and the surviving spouse can make any changes he or she wants to make, including revoking it.
Trust B is called many things, such as a marital trust or an exemption trust. Trust B can contain the deceased spouse's separate property and one-half of the community property. When the first spouse dies, Trust B becomes irrevocable. This means that the surviving spouse cannot change the beneficiary designations or the amounts that the beneficiaries are to receive from the trust. Typically, the surviving spouse will receive the income from Trust B and the deceased spouse's children will receive the principal. This provides for the surviving spouse and protects the deceased spouse's children.
Additionally, Trust B can contain provisions to prevent the surviving spouse from "draining" the trust of its assets. This prevents the surviving spouse from preserving his or her estate by using up all of the assets in Trust B, which would effectively disinherit the the deceased spouse's children.
If you are in a second marriage and either you or your spouse has children from a prior relationship, you may want to consider an A-B Trust to protect your children's inheritance.
(Illustration by Arthur Rackham, 1919)