An A-B trust is a particular type of trust which is used by married couples to help to minimize their estate tax liabilities. This type of trust will split the married couple’s assets into two parts upon the first death of a spouse. Generally, the objective of an A-B trust is to avoid being taxed twice on assets and helping to ensure assets are received by the intended beneficiaries.
How does an A-B trust work?
Upon the death of the first spouse, the surviving spouse will receive the assets placed in the A trust. At this point the assets in the B trust will be liable for estate taxes while the surviving spouse will generally be able to access assets in the B trust. Also, the surviving spouse will usually be able to obtain income from these assets as well. However, the rights of the surviving spouse to the assets will depend on how the trust documents are written.
How does gift and estate tax affect an A-B trust?
When A-B trusts were first created, they were meant to allow married couples to avoid paying unnecessary estate taxes. However, now with lifetime exemptions on federal gift and estate taxes, A-B trusts are less useful. As of now, each individual is allowed to exempt up to $11.58 million in estate taxes. This means that any amount of assets inherited below this amount can be passed to heirs free of taxation. Therefore, an A-B trust strategy would only be effective for estates which are quite large.
Is an A-B trust revocable?
Generally, an A-B trust can be revoked up until the point that one spouse passes away. At that point, the assets placed into the A trust will be put into a revocable trust while the assets placed into the B trust will be irrevocable.
What advantages does an A-B trust provide?
Despite the surviving spouse only having limited control over the assets placed in the B trust, there are certain advantages this arrangement provides. Usually, the B trust will be designed in a way that the surviving spouse will be allowed to receive income from trust assets. Also, if the couple’s home is placed in the B trust the surviving spouse will be able to live in the home.
Of course, there are considerable tax advantages of using an A-B trust wealth management strategy. Once the surviving spouse passes away only the assets from the A trust will be subject to estate taxation. The assets in the A trust will use the federal estate tax exemptions of the first deceased spouse while any assets in the B trust will be passed along to the surviving spouse free from taxation. This is because the B trust assets are not counted towards the surviving spouse’s estate when it comes to calculating estate tax liabilities.
Obtain professional advice on A-B trusts
Ultimately, whether or not an A-B trust strategy is right for you will depend on various financial and legal factors and how they apply to your particular circumstances. You will also want to discuss this with your spouse as well. A professional wealth management advisor will have the necessary knowledge to empower you to make the best decision for you and your spouse.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.