An A-B trust gets its name from the fact that it splits into two upon the death of one spouse. Trust A is the survivor’s trust and trust B or the decedent’s trust.
An A-B trust is a joint trust that you and your spouse create to minimize estate taxes. It is formed when you place assets in the trust and name, as the final beneficiary, anyone except your spouse. An A-B trust divides into two upon the death of either you or your spouse.
AB Trust & Bypass Trust
When the first spouse dies, the bypass trust, B trust, is funded with an amount equal to the applicable exclusion amount in order to minimize federal and state estate taxes. Any remaining marital assets would transfer to the surviving spouse outright or be held in trust for his or her benefit. Assets owned by the deceased spouse receive a basis adjustment at his or her death. The marital assets that are included in the surviving spouse’s estate get an additional basis adjustment at the surviving spouse’s death. Although the bypass trust avoids estate tax, assets held in this trust do not receive a basis adjustment when the second spouse dies. But the future growth of these assets remains outside the gross estate at the death of the second spouse.
How A-B Trust Works
After the death of either you or your spouse, that estate is taxed heavily denying beneficiaries money they could have received. To avoid estate taxes, you and your spouse will set up an A-B trust along with you wills. The outcome is that the death of one spouse will 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 s/he dies is put in an irrevocable trust called the Bypass trust, or B trust. This trust is also known as the decedent’s trust. Any remaining amount 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 To Maximizes Your Estate Tax Exemptions
You and your spouse includes the appropriate AB Trust language in your Last Will and Testaments or Revocable Living Trusts. You then divides all assets so that you and your spouse has about the same value of assets. This is an important step and must be done in order for the AB Trust system to work. Should you have assets in joint accounts you will not need to use an A-B trust. Joint assets pass outright to the surviving spouse instead of through the deceased spouse’s Last Will or Revocable Living Trust.
Portability of the Estate Tax Exemption
If the value of the deceased spouse’s estate is under the value of the federal estate tax exemption there is no need to establish the A Trust. The unused portion of the deceased spouse’s estate tax exemption can be transferred to the surviving spouse’s estate tax exemption. This will be important for couples who have lopsided estates or where the surviving spouse’s estate increases significantly in value after the first spouse’s death.
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