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Is An AB Trust Right For You?

Wondering if you need an AB Trust? Our guide breaks down the pros and cons of this Trust to help you decide if it’s the right option for you.

As much as we might like it to, Estate Planning doesn’t end when you create a Last Will and Testament. Often these documents need to be updated every three to five years, or supplemented with a Trust. These additional steps are especially important for those who have children, a home, or assets over $160,000. The creation of a Trust can help designate how these assets are handled after your death, and add an extra level of protection for your loved ones. 

There are numerous types of Trusts available. For example, if you are married, the creation of  an AB Trust may be the best route. These Trusts can help bypass hefty estate taxes in the event one spouse passes away first, though they are not for everyone. Keep reading to learn about:  

What is an AB Trust? 

An AB Trust is a Trust created by married couples to help minimize estate taxes for the surviving spouse after one spouse passes away. This joint Trust allows the estate to be split into two parts (or Trusts) after the death of a spouse, and then be taxed accordingly. The purpose of AB Trusts is to help avoid double taxation and ensure that your assets transfer to the right beneficiary, usually your spouse, after death.

How Does an AB Trust Work?

An AB Trust works by splitting a married couple’s assets into two separate Trusts, referred to as A and B. This distinction is established during the AB Trust set up when the couple writes a Last Will and Testament or creates a Living Trust. At that time, couples will divide their assets in equal parts to put into each Trust (as leaving them in joint accounts will void the AB Trust). 

Looking at an AB Trust example can help illustrate this process: after the first spouse dies, the assets in A Trust will go to the surviving spouse. At the same time, the assets in B Trust will be subject to estate taxes. The surviving spouse will still have access to the income or assets left in B Trust after taxation, if those terms were specified when the Trust was created. Once the last spouse dies, only the assets in A Trust will be subject to estate taxes -- thus avoiding double taxation. 

Commonly Asked Questions about AB Trusts

AB Trusts can be tricky to fully comprehend, as they dive into the minutiae of Estate Planning law. The following commonly asked questions should help further your understanding of AB Trusts and allow you to determine if this option is right for you and your spouse: 

Are AB Trusts Obsolete?

AB Trusts are not entirely obsolete, though they are much less useful than they once were because of changes in estate law over time. AB Trusts were initially created to reduce estate taxes between married couples; however, currently each individual has a lifetime federal gift tax and estate tax exemption of up to $11.58 million. 

Is an AB Trust Irrevocable?

An AB Trust is revocable until one spouse in a married couple dies. At that point, part of the assets are put into a revocable Trust for the surviving spouse; while the other portion goes into an irrevocable Trust on behalf of the deceased spouse.  The A portion of the AB Trust is the revocable part for the spouse and the B portion is the irrevocable part.

What is the Difference between a Marital Trust and a Bypass Trust?

Once an AB Trust goes into effect, it transforms into both a marital Trust and a bypass Trust. The Marital Trust is another name for the Trust being left to the surviving spouse. A Bypass Trust is the name of the Trust by the deceased spouse, it is sometimes also known as a Family Trust or Credit Shelter Trust. 

What are the Pros and Cons of AB Trusts?

AB Trust Estate Planning can be most beneficial for couples who live in a state without a portability for exemptions. Essentially, an AB Trust could help these individuals avoid state estate taxes. AB Trusts can also help ensure your beneficiaries are not changed by your spouse after your death. Similarly, these trusts can help designate where certain assets will go if you need to protect them from your spouse for whatever reason. 

For the most part, estate law has evolved enough to prevent the need for an AB trust if your intention is to prevent double taxation. AB Trusts can be challenging for couples as the deceased spouse’s assets are put into an irrevocable Trust. This can limit the flexibility and freedom available to the surviving spouse. 

The creation of a Trust can provide you with more control over your assets and help with your Estate Planning process. An AB Trust is one of the many options available to married couples — and is something worth considering for those who live in a state without certain exemptions. AB Trusts can be a great way to guarantee your beneficiaries and provide support to your spouse after death. If there is a question we didn’t answer, Reach out to us today or Chat with a live member support representative! 

Estate Planning is one of the most important things you can do to protect yourself, your family, and your future. Not sure where to start? Trust and Will can help! Explore what we have to offer!


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