An AB Trust is a type of estate planning tool that consists of two separate trusts – Trust A (also known as the "Marital Trust" or "Survivor's Trust") and Trust B (also known as the "Bypass Trust" or "Credit Shelter Trust"). The primary purpose of an AB Trust is to minimize estate taxes and provide financial security for the surviving spouse while ensuring that the assets are ultimately distributed according to the wishes of the trust creators. AB Trusts are designed to protect the assets of the couple and provide financial support for the surviving spouse, while ensuring that the remaining assets are distributed to the designated beneficiaries (typically children or other family members) after the death of the surviving spouse. AB Trusts are an essential tool for married couples who have significant assets and want to minimize potential estate taxes while maintaining control over the distribution of their assets. By establishing an AB Trust, couples can ensure that their wealth is preserved for the benefit of their surviving spouse and their chosen beneficiaries, while also taking advantage of the available estate tax exemptions. The A Trust, also known as the Marital Trust or Survivor's Trust, is the portion of the estate that benefits the surviving spouse. Upon the death of the first spouse, the assets in the A Trust are available for the surviving spouse's use during their lifetime, providing them with financial security and support. The A Trust is typically structured to qualify for the unlimited marital deduction, ensuring that no estate taxes are due upon the first spouse's death. The B Trust, also known as the Bypass Trust or Credit Shelter Trust, is designed to hold the assets of the first spouse to pass away up to the amount of the applicable estate tax exemption. These assets are not subject to estate taxes upon the first spouse's death and are also protected from estate taxes when the surviving spouse passes away. The B Trust provides for the beneficiaries (usually children or other family members) after the death of the surviving spouse, ensuring that the trust assets are distributed according to the wishes of the trust creators. The primary difference between the A and B Trusts lies in their beneficiaries and tax treatment. The A Trust is designed to benefit the surviving spouse and is generally not subject to estate taxes due to the unlimited marital deduction. The B Trust, on the other hand, is designed to benefit the couple's chosen beneficiaries while sheltering the assets from estate taxes by utilizing the estate tax exemption. One of the main benefits of AB Trusts is the potential for significant estate tax savings. By dividing the couple's assets between the A and B Trusts, married couples can take advantage of both spouses' estate tax exemptions, reducing or eliminating estate taxes upon the death of the second spouse. AB Trusts provide a level of asset protection for the surviving spouse and the ultimate beneficiaries. The assets held in the B Trust are generally protected from the creditors of the surviving spouse, ensuring that the trust creators' intended beneficiaries receive their inheritance. AB Trusts offer a high level of control over the distribution of assets. The trust creators can specify the beneficiaries of the B Trust, as well as the conditions under which those beneficiaries will receive their inheritance. This can be particularly useful in cases where the trust creators have children from previous marriages or wish to provide for specific needs or circumstances of their beneficiaries. AB Trusts offer flexibility in estate planning, allowing couples to tailor the trust structure to their unique needs and circumstances. The trust creators can specify the terms of the trusts, including the distribution of assets, the choice of trustee, and the management of the trust assets. Establishing and administering an AB Trust can be a complicated process, requiring the assistance of experienced legal and financial professionals, such as a financial advisor. This complexity can make it more difficult for the surviving spouse and beneficiaries to understand and manage the trust. The cost of establishing and maintaining an AB Trust can be significant. Legal and professional fees, as well as ongoing administration costs, can add up over time. It is essential to weigh the potential estate tax savings and other benefits of an AB Trust against these costs when deciding whether an AB Trust is the right estate planning tool for a particular situation. AB Trusts can result in the loss of the step-up in basis for assets held in the B Trust. The step-up in basis allows beneficiaries to inherit assets at their current fair market value, potentially reducing capital gains taxes when the assets are sold. However, assets held in the B Trust do not receive a step-up in basis upon the death of the surviving spouse, which can lead to higher capital gains taxes for the beneficiaries. The surviving spouse may have limited access to the assets held in the B Trust, depending on the terms of the trust. While the surviving spouse is often entitled to the income generated by the B Trust assets, they may not have the ability to access the principal without the consent of the trustee. This can create financial challenges for the surviving spouse, particularly if their needs change over time. To establish an AB Trust, a couple must be married and have a combined estate that exceeds the applicable estate tax exemption amount. Both spouses must agree on the terms of the trust, including the division of assets, the choice of beneficiaries, and the designation of a trustee. The process of establishing an AB Trust typically begins with consulting an experienced estate planning attorney, who can help the couple draft a trust agreement that outlines the terms of the A and B Trusts. The couple will then need to transfer their assets into the trust and designate a trustee to manage the trust assets. Upon the death of the first spouse, the trust assets will be divided into the A and B Trusts according to the terms of the trust agreement. When considering an AB Trust, couples should carefully evaluate their financial situation, their goals for their estate, and the potential benefits and drawbacks of an AB Trust. Factors to consider include the size of the estate, the applicable estate tax exemptions, the needs of the surviving spouse, and the goals for the ultimate distribution of the assets. The trustee of an AB Trust has several important duties, including managing the trust assets, distributing income to the surviving spouse, and ensuring that the trust complies with all applicable laws and regulations. The trustee must act in the best interests of the trust beneficiaries and is held to a high standard of care and accountability. AB Trusts require ongoing tax reporting and compliance, including the filing of annual trust income tax returns and the payment of any taxes due. The trustee is responsible for ensuring that the trust meets all of its tax obligations and that the assets are managed in a tax-efficient manner. The trustee of an AB Trust must maintain accurate and complete records of all trust transactions, including asset transfers, income distributions, and expenses. These records are essential for ensuring that the trust remains in compliance with applicable laws and regulations and for providing a clear record of the trust's activities for the beneficiaries. As circumstances change, it may become necessary to revise the terms of the AB Trust. This can include updating the distribution provisions, changing the trustee, or making other adjustments to the trust structure. Revising an AB Trust typically requires the assistance of an experienced estate planning attorney and the consent of the affected parties, including the surviving spouse and the beneficiaries. AB Trusts are a powerful estate planning tool for married couples with significant assets who wish to minimize estate taxes and maintain control over the distribution of their wealth. Consisting of two separate trusts – A Trust and B Trust – AB Trusts provide financial security for the surviving spouse while ensuring that the couple's chosen beneficiaries ultimately receive their intended inheritance. AB Trusts offer several advantages, including estate tax savings, asset protection, control over the distribution of assets, and flexibility. However, they also come with some disadvantages, such as complexity, cost, loss of step-up basis, and limited access to trust assets for the surviving spouse. Establishing an AB Trust requires careful planning and consultation with experienced legal and financial professionals. Ultimately, an AB Trust can be an effective way for married couples to minimize estate taxes and maintain control over their assets. What Is an AB Trust?
Components of AB Trusts
A Trust
B Trust
Differences Between A and B Trusts
Advantages of AB Trusts
Estate Tax Savings
Asset Protection
Control Over Distribution of Assets
Flexibility
Disadvantages of AB Trusts
Complexity
Cost
Loss of Step-Up Basis
Limited Access to Trust Assets
Establishing an AB Trust
Requirements for AB Trust
Process of AB Trust
Considerations for AB Trust
Administering an AB Trust
Trustee Duties
Tax Reporting
Maintaining Proper Documentation
Revising the Trusts
The Bottom Line
AB Trust FAQs
AB Trust is a type of estate planning trust that divides assets into two trusts to help minimize estate tax.
An AB Trust splits assets into two trusts: the A Trust, which is revocable, and the B Trust, which is irrevocable, allowing for tax savings.
AB Trusts offer benefits such as estate tax savings, asset protection, and control over distribution of assets.
AB Trusts can be complex to establish and manage, can be costly, may lead to loss of step-up basis, and restrict access to trust assets.
Establishing an AB Trust requires meeting certain requirements, funding the trusts, choosing trustees, and drafting a trust agreement. A lawyer can help with the process.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
