If you and your spouse are thinking about making an estate plan, one of your options could be an AB trust. Many couples have used AB trusts to lower estate tax bills and to make sure that the surviving spouse has financial resources.
What Is an AB Trust?
An AB trust begins as a single joint trust that a married couple creates. Often, each spouse places assets in the trust. The trust’s beneficiary or beneficiaries can be anyone besides the two spouses.
The name “AB trust” comes from the split that happens when one spouse dies. The trust splits in half, with one trust becoming “trust A” or the “survivor’s trust” and the other “trust B” or the “decedent’s trust”. When the original trust splits, money from the original trust that totals the amount of the estate tax exemption in the year that the first spouse dies goes into trust B. The rest of the money from the original trust goes into trust A.
The surviving spouse has complete control over trust A and can use the money in it to pay for expenses. On the other hand, the surviving spouse does not have control over trust B. While a carefully drafted AB trust may allow a surviving spouse distributions from trust B, the principal often stays intact. It will be distributed to the named beneficiaries when the surviving spouse passes away.
Why Are AB Trusts Helpful for Couples?
Married spouses create AB trusts to take advantage of the marital deduction and to correspondingly prevent expensive estate tax bills. Estate taxes on trust A are deferred until the death of the surviving spouse. In addition, trust B is not part of either spouse’s estate and the surviving spouse has no control over it.
As a result, trust B is not part of the surviving spouse’s estate when he or she passes away, lowering potential estate taxes as a whole for the couple. Further, the surviving spouse can take advantage of estate tax portability to keep any remaining portion of the deceased spouse’s estate tax exemption.
The surviving spouse gets the benefit of funds from trust B without control over them, as well as control over funds in trust A. When the surviving spouse dies, his or her potential estate taxes are lower. In addition, an AB trust can provide financial security for the surviving spouse. This is helpful especially if one or both of the spouses does not have an income or plans to retire soon.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.