Wednesday, January 24, 2018

What is an AB Trust?

September 16, 2010 by  
Filed under Estate Planning

Today’s Preventive Law Tip: Use an AB Trust in order to preserve your estate tax exemption upon the first spouse’s death.

In 2011 the estate tax is scheduled to return with an exemption amount of only $1 million per person and a top tax rate of 55%. This gives  married couples a combined exemption of $2 million. In order to maximize the benefit of each person’s $1 million exemption, proper planning techniques must be used. An AB trust otherwise known as a credit shelter trust, bypass trust, or an exemption trust, is a way to use the exemption amount of the first spouse to die in order to provide for the surviving spouse while also avoiding inclusion of the trust property in the surviving spouse’s estate.  Since the trust property is never included in the surviving spouse’s estate, that amount is never subject to estate taxes.  Compare that to leaving the entire $1 million dollars to the surviving spouse, which would result in estate taxes on $1 million of a $2 million estate once the surviving spouse dies.

An AB Trust is called that because at the death of the first spouse, the trust property is divided into two separate trusts, Trust A and Trust B.  Trust B usually holds the surviving spouse’s property and is subject to total control by the survivor.  Trust A is usually funded with the decedent’s property valued up to the exemption amount. It usually provides that all of the income from Trust A will be used for the benefit of the surviving spouse for life and then the trust property goes to designated final beneficiaries (usually your children). So if the A Trust is funded with $1 million, that $1 million would never be included in the surviving spouse’s estate, thus all of the property in Trust A passes to the final beneficiaries tax-free.

In 2009 each person’s estate tax exemption was $3.5 million. With a combined exemption of $7 million for married couples, estate planning to preserve the exemption was less of an issue then. With only a one million dollar exemption scheduled for 2011 many more households will be subject to the estate tax.  Use of an AB Trust is only one of many estate planning techniques that can reduce your estate taxes.

If you believe you may need planning in order to reduce and or eliminate estate taxes, please speak to an experienced estate planning attorney who can advise you on the advantages and disadvantages of using an AB trust.


Proviso Law Group’s attorneys are experienced in estate tax reduction techniques and asset preservation for your family.  We can establish a personalized estate plan for you and your family.  Call us today!

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