AB Trust
Overview
An AB Trust, also known as a bypass trust or marital credit shelter trust, is a strategic estate planning tool designed for married couples to minimize estate taxes and maximize the amount of wealth passed to their beneficiaries. This trust structure splits into two parts upon the death of the first spouse: Trust A (the Marital Trust) and Trust B (the Bypass Trust).
Key Components and Structure
Trust A (Marital Trust)
- Purpose: Provides for the surviving spouse
- Control: Surviving spouse maintains complete control
- Tax Treatment: Qualifies for unlimited marital deduction
- Access: Surviving spouse can:
- Use principal and income
- Change beneficiaries
- Make investment decisions
Trust B (Bypass Trust)
- Purpose: Preserves estate tax exemption of first spouse to die
- Control: Irrevocable with predetermined terms
- Tax Treatment: Uses first spouse's estate tax exemption
- Access: Surviving spouse can:
- Receive income
- Access principal (with restrictions)
- Cannot change beneficiaries
Benefits and Advantages
-
Tax Efficiency
- Maximizes both spouses' estate tax exemptions
- Reduces overall estate tax liability
- Protects appreciation from future taxation
-
Asset Protection
- Shields assets from creditors
- Protects inheritance for children
- Prevents unintended beneficiaries
Common Applications
When to Consider an AB Trust
- Estates exceeding federal estate tax exemption
- Blended families with children from previous marriages
- Concerns about future tax law changes
- Desire for asset protection
Frequently Asked Questions
Q: Who should consider an AB Trust?
A: Married couples with combined estates approaching or exceeding the federal estate tax exemption amount should consider an AB Trust.
Q: Can the surviving spouse access Trust B assets?
A: Yes, but with limitations. Access to Trust B is typically restricted to health, education, maintenance, and support needs.
Q: Is an AB Trust revocable?
A: While both spouses are alive, the trust is typically revocable. Upon the first spouse's death, Trust B becomes irrevocable.
Q: What are the downsides of an AB Trust?
A:
- Additional administrative complexity
- Separate tax returns required
- Less flexibility for surviving spouse
- Higher ongoing costs
Summary
An AB Trust remains a valuable estate planning tool for married couples seeking to maximize tax efficiency and protect assets for future generations. While complex, its benefits often outweigh the administrative burden for estates facing potential tax liability. Professional guidance is essential when considering this strategy to ensure proper structure and implementation.
Note: Estate tax laws frequently change. Consult with a qualified estate planning attorney for current regulations and specific advice.
Important Considerations
- Regular review and updates needed
- Professional administration recommended
- Clear communication with beneficiaries
- Coordination with other estate planning documents
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Related Terms
Here are some related terms that are relevant to the estate planning term "AB Trust":
- Bypass Trust
- Marital Credit Shelter Trust
- Revocable Living Trust
- Irrevocable Trust
- Estate Tax Exemption
- Asset Protection
- Blended Family
- Estate Planning Attorney
- Inheritance
- Tax Minimization
- Wealth Preservation
- Beneficiary Designation
- Probate
- Grantor
- Trustee
- Executor
- Fiduciary Duty
- Testamentary Trust
- Qualified Terminable Interest Property (QTIP) Trust
- Generation-Skipping Transfer (GST) Tax
- Portability
- Stepped-Up Basis
These terms cover various aspects of estate planning, trust structures, tax considerations, family dynamics, and the roles and responsibilities of key parties involved in the AB Trust arrangement.
