An irrevocable trust created by a married couple to avoid probate and minimize federal estate tax. An AB trust is created by each spouse placing property into a trust and naming someone other than his or her spouse as the final beneficiary of that trust. Upon the death of the first spouse, the surviving spouse does not own the assets in that spouse’s trust outright, but has a limited power over the assets in accordance with the terms of the trust. Such powers may include the right to receive interest or income earned by the trust, to use the trust property during his or her lifetime, e.g. to live in a house, and/or to use the trust principal for his or her health, education, or support. Upon the death of the second spouse, the trust passes to the final beneficiary of the trust. For estate tax purposes, the trust is included in the first, but not the second, spouse’s estate and therefore, avoids double taxation.
A-B Trust is a way to avoid property taxes (if you have a fairly large building) for married couples. The AB Trust system allows that after the death of one of the spouses, the other could use the property of the deceased. Division of AB trust into two separate trusts:
- Trust A is referred to as marital trust. Trust A must belong to the federal subtraction of marriage property tax.
- Trust B is most often presented as a credit shelter, family trust or bypass. Ineligible for federal marriage tax deduction.
In AB Trust, various block diagrams and charts should be used. This helps in tracking their assets.
The most important goal of AB Trust is to create savings for married couples from property tax. The most important thing at AB Trust is to maintain the assets of the deceased spouse. For some couples, establishing AB Trust is very useful.
Having an AB trust is beneficial if you want to leave most of your assets to your spouse and if you have joint property with your spouse.
Understanding an A-B Trust
After the death of an individual, their estate is taxed heavily before their beneficiaries receive it. For example, consider a married couple that has an estate worth $3 million by the time one of the spouses dies. The surviving spouse is left with $3 million, which is not taxed due to the unlimited marital deduction for assets flowing from a deceased spouse to a surviving spouse. However, if the other spouse dies and their estate tax exemption is $1 million, the taxable portion of the estate will be $2 million. This means that $2 million will be taxed at 40% and the remaining amount will be transferred to the beneficiaries.
To circumvent the estate from being subject to such steep taxes, many married couples set up a trust under their last will and testaments called an A-B trust. In the example above, if the couple instead had an A-B trust, the death of the first spouse would not trigger any estate taxes as a result of the lifetime exclusion. After death, the sum of money equal to the estate tax exemption in the year that they die is put in an irrevocable trust called the bypass trust, or B trust. This trust is also known as the decedent’s trust. The remaining amount, $2 million, will be transferred to a survivor’s trust, or A trust, which the surviving spouse will have complete control over. The estate tax on the A trust is deferred until after the death of the surviving spouse.
How an AB Estate Plan Works:
- The couple has their Estate Planning Lawyer incorporate the necessary technical language into their Will or Revocable Living Trust.
- Assets are arranged to comply with the AB Trust plan.
- At the first spouse’s death, an amount that can be sheltered from estate tax pours into the Bypass or “B” Trust. The remainder pours into the Marital or “A” Trust.
- During the surviving spouse’s life, the assets in both trusts are sheltered from creditors and subsequent marriages.
- The “A” Trust is included in the surviving spouse’s estate, utilizing his or her estate tax exemption.
- The assets can continue in protective trusts for their children, sheltered from their divorces and creditors.
Example of A-B Trust
AB trust maximizes property tax exemption, allowing every person in the marriage to fully enjoy it. Example of AB trust operation. Let’s assume that one marriage has a total of $ 2 million. If one person had left one million dollars to another, the surviving spouse would have had two million dollars. Of this amount, $ 500,000 would be taxable if the spouse died in 2008. To avoid such a high tax, trust AB was created. Each of them leaves $ 1 million in their confidence (A and B), lists their children as beneficiaries. If one of the spouses dies, the amount is paid to the other, but because the amount is less than the federal exemption, no tax is required.
What are the Pros and Cons of AB Trusts?
AB Trust Estate Planning can be most beneficial for couples who live in a state without a portability for exemptions. Essentially, an AB Trust could help these individuals avoid state estate taxes. AB Trusts can also help ensure your beneficiaries are not changed by your spouse after your death. Similarly, these trusts can help designate where certain assets will go if you need to protect them from your spouse for whatever reason.
For the most part, estate law has evolved enough to prevent the need for an AB trust if your intention is to prevent double taxation. AB Trusts can be challenging for couples as the deceased spouse’s assets are put into an irrevocable Trust. This can limit the flexibility and freedom available to the surviving spouse.
The creation of a Trust can provide you with more control over your assets and help with your Estate Planning process. An AB Trust is one of the many options available to married couples — and is something worth considering for those who live in a state without certain exemptions. AB Trusts can be a great way to guarantee your beneficiaries and provide support to your spouse after death.