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What Is an AB Trust?
An “AB” trust can help reduce exposure to estate taxes for married couples with joint trusts. Under an AB trust, the estate’s assets are allocated to two separate trusts upon […]
An “AB” trust can help reduce exposure to estate taxes for married couples with joint trusts. Under an AB trust, the estate’s assets are allocated to two separate trusts upon the death of a spouse. The first trust, sometimes referred to as the “A trust” or the “survivor’s trust,” remains revocable, and the assets are controlled by the surviving spouse. The second trust, sometimes referred to as the “B trust,” “decedent’s trust,” “bypass trust” or “credit shelter trust,” becomes irrevocable after the death of the first spouse.
The assets of the B trust typically can be used by the surviving spouse during his or her lifetime. However, sometimes the B trust only benefits other people, such as the children from the first marriage, rather than the spouse of the second marriage. After the surviving spouse dies, the assets of the B trust are then distributed to third-party beneficiaries, such as the couple’s children.
The assets of the bypass trust are not considered part of the surviving spouse’s estate. They pass to the third-party beneficiaries free of estate tax by using the estate tax exemption of the first spouse.
Keep in mind, however, that a large portion of your assets may not be subject to estate taxes at all. As of 2020, only assets in excess of $11.58 million were taxable by the federal government, and that amount increased to $11.7 million in 2021. (Double those amounts for married couples.) The tax rate for amounts above that threshold is as high as 40%, but that number only applies to very large estates.
Additionally, most states don’t levy an estate tax, although those that do have much lower thresholds than the IRS. Before investing the time and money to set up an AB trust, you may want to consider speaking with a tax professional to determine exactly what your exposure may be.
Sources
“A-B Trust: Definition, How It Works, and Tax Benefits”. Investopedia. https://www.investopedia.com/terms/a/a-b-trust.asp
“Joint Trusts or Separate Trusts: Advice for Married Couples”. Kiplinger. https://www.kiplinger.com/retirement/estate-planning/601782/joint-trusts-or-separate-trusts-advice-for-married-couples
“Estate Tax: Definition, Tax Rates and Who Pays”. NerdWallet. https://www.nerdwallet.com/article/taxes/estate-tax
