A-B Trust

MoneyBestPal Team
A joint trust that splits into two separate trusts when one spouse dies, allowing both spouses to take advantage of their individual estate tax exempt
Image: Moneybestpal.com

An A-B trust is a joint trust that divides into two independent trusts upon the passing of one spouse, enabling both spouses to benefit from their respective estate tax exemptions.

How does an A-B trust work?

When a married couple creates an A-B trust, their assets are split into two separate trusts: the bypass trust (B) and the survivor's trust (A) (B). The assets of the surviving spouse are held in the survivor's trust, while the estate tax exemption of the deceased spouse is held in the bypass trust for the assets of the deceased spouse. The survivor's trust's assets are accessible to the surviving spouse, who also has access to the bypass trust's income and restricted benefits. It is impossible for anyone to alter or remove the bypass trust.

An A-B trust's principal advantage is that both spouses can use their inheritance tax exemptions without having their assets subject to estate taxes twice. For instance, each spouse will be able to avoid paying federal estate taxes on up to $12.92 million in 2023. A married couple can avoid paying any federal estate taxes when one spouse passes away and when the surviving spouse passes away if they create an A-B trust and have a combined estate of $20 million.

This is how it works:
  • The bypass trust (B) receives $12.92 million of the first couple's assets upon death, while the remaining $7.08 million is transferred to the survivor's trust (A). Due to the utilization of the deceased spouse's estate tax exemption, the transfer of assets to the bypass trust is tax-free. Due to the unlimited marital deduction, which enables couples to leave any amount of property to one another without paying estate taxes, the transfer of assets to the survivor's trust is likewise tax-free.
  • The $7.08 million in the surviving spouse's trust is subject to estate taxes upon their passing, but they can utilize their own $12.92 million estate tax exemption to offset this cost. Because the $12.92 million in the bypass trust was already exempt when the first spouse passed away, it is not liable to estate taxes again. The beneficiaries can therefore receive the entire $20 million without having to pay any federal estate taxes.

What are some advantages and disadvantages of an A-B trust?

Married couples who have a sizable estate that exceeds the individual exemption limit might save a lot of money on estate taxes by using an A-B trust. Since the deceased spouse's assets are placed in an irrevocable trust, it can also prevent the surviving spouse or their creditors from misusing or diverting them. Also, an A-B trust can protect the beneficiaries' principal while supplying the surviving spouse with income and support.

Before creating an A-B trust, one should take into account some of its disadvantages. For starters, compared to a straightforward will or a revocable living trust, an A-B trust needs more paperwork and legal expenditures. To make sure that their assets are properly titled and divided between the two trusts, it also demands meticulous planning and coordination between spouses. However, many couples who have estates that are close to or below the exemption threshold or who reside in areas without state estate taxes or with portability of exemptions between spouses may not need an A-B trust.

Is an A-B trust right for you?

A-B trusts can be effective estate planning tools, but they are not right for everyone. You should speak with a knowledgeable estate planning lawyer who can help you determine whether an A-B trust is a good fit for your needs and objectives. As your circumstances or tax rules change, you should routinely examine your estate plan and alter it as necessary.