Understanding An A-B Trust
Understanding An A-B Trust
An A-B trust is an estate planning device that can be confusing to a first timer. It’s a two-part trust that divides your assets in a way that will minimize the amount of estate tax paid upon your passing.
There are several reasons why a couple will choose to create an A-B trust. For example, it may provide protection for the children of the deceased. Additionally, it can also be used to shelter the assets from creditors and divorces.
However, before you decide to set up an A-B trust, you need to understand the most important details. First, you should know that the A-B trust was once a popular estate planning tool, especially when the estate tax exemption was low. Currently, married couples are able to pass up to $22 million tax-free. If you are considering using an AB trust, you should consult a competent estate planning attorney to determine the best course of action.
The B part of an A-B trust is a bypass trust, which can be a tax savings for the surviving spouse. This type of trust shelters the assets of the surviving spouse from creditors during their lifetime. After the surviving spouse dies, the assets are dispersed among the remaining beneficiaries. Some of these assets may even be distributed to children of the deceased.
Protecting the surviving spouse from creditors
A bypass trust can also help offset the hefty tax burden. For instance, you may decide to leave your home to your children. Depending on how much you own, you may be able to exclude the sale of the home from your taxable income. Another benefit of the AB trust is that your loved ones will be able to use generation-skipping exemptions to avoid triggering estate taxes.
While the AB trust is a useful tool for the surviving spouse, there are many negatives associated with the trust. For one, if you live in a state that taxes estates, you will still have to file a separate income tax return for the trust every year. You will also have to continue to accurately track and record all of the assets within the trust. Finally, there is a chance that the assets in the trust will be taxed again when the surviving spouse dies.
An AB trust is not a replacement for a will, but it can be a helpful tool in the process of transferring assets. When done properly, an AB trust can protect your estate from probate. But if you have a complicated estate, you may find that an A-B trust is not the best choice. As with all estate planning strategies, consult an estate planning attorney for advice. Creating an AB trust can be very complicated, so you should hire a professional.
Although an AB trust was once the prevailing tax advantage, the benefits have diminished in recent years. Couples now have higher estate-tax exemptions, so you may want to consider other options.
Disclaimer: This is not legal advice and is simply an answer to a question and that if legal advice is sought to contact a licensed attorney in the appropriate jurisdiction.
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