BENEFITS OF AB TRUSTS FOR SPOUSES
An AB trust is a common trust used for spouses. This type of trust is sometimes also called a Family Trust and Marital Trust/Bypass Trust/Credit Shelter Trust/Qtip Trust or Marital Deduction Trust. An AB Trust, like many other trusts, is a useful way to minimize estate taxes and to preserve wealth, because it allows for an exemption of the surviving spouse to pass to them and allow them to use the exemption.
In order to get the benefits of an AB Trust, the couple must include the appropriate AB Trust language in their Living Trusts and Wills and each should have apportion their assets so that each spouse has approximately the same number or amount of assets in their Revocable Living Trust or in their name. Once this has occurred, the living trust is divided into two sections, Trust A and Trust B. To divide the trust assets into parts, is is prudent to determine the fair market value of all of the trust’s assets as of the date of death. After dividing up the assets, the trustee can decide which assets to place into Trust A and Trust B, respectively. The two trusts are oftentimes referred to as the “survivor’s trust” or the “bypass trust.”
Trust B is also called the “Bypass Trust,” “Credit Shelter Trust,” or “Family Trust” and holds the assets of the decedent/grantor of the trust. Typically Trust B is comprised of the decedent’s separate property and one-half of the community property. The remaining assets are placed in Trust A, also known as the “Marital Trust,” “QTIP Trust,” or “Marital Deduction Trust.” Upon the passing of the first spouse, Trust A becomes a revocable trust, and the survivor has control of its assets. Since Trust A is a marital deduction trust for the benefit of the surviving spouse, all assets found in Trust A are tax exempt. As the AB Trust is structured, upon the passing of the first spouse, the surviving spouse will have control of the assets in the A Trust and receives income from the B Trust.
With respect to taxes, for Trust A, the assets in the A Trust are taxed as part of the surviving spouse’s estate, and the estate tax on the A Trust is postponed until after the surviving spouse passes. The B Trust is subject to estate taxes but because of the applicable exemption, no taxes are owed. The assets in the B Trust will pass (estate) tax free to the beneficiaries. The reason for this is due to the estate tax exemption was used already by the B Trust when the first spouse passed, so anything leftover in the B Trust passes estate tax free. Upon the passing of the surviving spouse, only the A trust is subject to federal estate taxes because the B trust was taxed when the first spouse passed. The remainder of the A Trust will incur estate taxes only after the second spouse dies and it passes to the final beneficiaries.
An AB Trust can increase the payout to the final beneficiaries if the surviving spouse does not use the assets from the B Trust and allows them to grow in value during the surviving spouse’s lifetime. The B trust can continue for the benefit of the grantors’ heirs, usually the children. As the trust assets can be apportioned into equal trusts for the benefit of the grantors’ children, who will receive the income and then later will receive the principal.
For further information about the benefits of an AB Trusts, Bypass Trusts, Credit Shelter Trusts, Family Trusts, Martial Trusts, QTIP Trusts, or Martial Deduction Trusts, please call the Evans Law Firm and talk to our estate planning attorney (415) 441-8669. Your initial consultation is free and confidential.