Due to recent changes in federal and state law over the past few years, many families are wondering if there is still a need for complicated tax-avoidance trusts. Traditionally, an AB trust was created by married couples for the purpose of minimizing estate taxes, but increased exemptions, large breaks for married couples, repeal of state taxes, and marriage equality rulings have left many wondering if they are still necessary.
The fact of the matter is that there is still a place for AB trusts, but knowing a little more about them can help you determine if it is an avenue worth pursuing given your unique situation. To help in this process, we have answered a few frequently asked questions regarding AB trusts and their current relevance.
What Is an AB Trust?
An AB trust is a joint revocable living trust created by a married couple that divides into an A Trust (Survivor’s) and B Trust (Decedent’s) upon the death of the first spouse.
This type of revocable living trust is formed with each spouse transferring assets in the trust and naming joint beneficiary(ies) or even beneficiaries that are outside of the union.
The A/B trust provides the surviving spouse with less control over the “B/Decedent’s” trust but allows the surviving spouse to use all of the income and the principal from the Decedent’s Trust for his or her health, education, maintenance, and support, while also providing some creditor protection over these assets.
How Does an AB Trust Work?
In many instances, the estate of the deceased is taxed heavily before it is received by the beneficiaries. With a standard trust, the estate is not usually taxed by the time one of the spouses dies but is heavily taxed after the second spouse passes away. To circumvent this issue, an AB trust can be established where the death of the first spouse will not trigger any taxes at all due to lifetime exemption. After death, money in the amount of the estate tax exemption is put into an irrevocable trust called the B trust— or bypass trust.
Revocable or Irrevocable?
AB trusts are revocable (changeable) until one spouse passes away. At that point, a portion of the assets are placed in a revocable trust and some are placed in an irrevocable trust on behalf of the deceased spouse.
Do I Need an AB Trust?
Again, this will largely depend on the situation. While many simple probate-avoidance trusts may do the trick for some couples, AB trusts can still be very useful for those in second marriage situations, for those who are not legally married, if the estate’s value exceeds the combined value of estate tax exemptions, or if the couple wants to ensure that children (especially from a prior partnership) receive certain assets.
When Should I Consult a Lawyer?
When it comes to estate planning and asset protection, it is always advisable to contact a qualified estate planning attorney. Changing laws and circumstances over time often warrant estate plan revisions and updates. There are many moving pieces as well as legalities to stay abreast of. If you have questions about your estate plan, how to start a trust, or which trust you should establish, contact us at Morris Hall PLLC, today.