What is an AB Trust?
An AB Trust is a type of trust structure often used in estate planning to take advantage of maximizing state and federal estate tax exemption. It is commonly found in the provisions of the Revocable Living Trust within a comprehensive estate plan. The primary purpose of an AB Trust is to minimize estate taxes while providing for the surviving spouse and preserving assets for future generations. It was the most common type of trust for a married couple through 2010. Since portability of the deceased spouse's estate tax exemption amount became law in 2011, this type of trust is most commonly used with blended families.
Before we dive in, here is a quick refresher.
A Revocable Living Trust is a flexible estate planning tool that allows the grantor to manage and control their assets during their lifetime. The trust can be amended, revoked, or terminated by the grantor.
How an AB Trust relates to a Revocable Living Trust in an Estate Plan:
Comprehensive Estate Plan:
In a comprehensive estate plan, the AB Trust is often established after death as part of the overall strategy. It should be included in the provisions of the Revocable Living Trust. The Revocable Living Trust serves as the foundation for the plan, allowing for efficient management and distribution of assets during the grantor's lifetime and after their death.
Funding the Revocable Living Trust:
The grantor transfers assets into the Revocable Living Trust during their lifetime. The trust becomes the owner of these assets, and the grantor retains control over them. At the first death, the deceased spouse's interest in the assets (up to the estate tax exemption amount) funds the "B" Trust. The surviving spouse's interest in the assets funds the "A" Trust.
AB Trust Structure:
The AB Trust consists of two sub-trusts: the A Trust (often called the Survivor's Trust) and the B Trust (often called Bypass or Family Trust). Upon the first grantor's death, the assets are divided between these two trusts based on the terms outlined in the estate planning documents.
Survivor's Trust (A Trust):
The A Trust, often known as Survivor's Trust, holds assets for the benefit of the surviving spouse. This trust remains revocable and amendable by the surviving spouse. It reports under the surviving spouse's social security number and will get a step up in basis at the surviving spouse's death.
Bypass or Family Trust (B Trust):
The B Trust or Family Trust, is designed to use the deceased spouse's estate tax exemption to shelter assets from estate taxes. This trust is irrevocable. The surviving spouse is often able to live on this trust for his/her own needs (or can be limited in various ways), while preserving assets for future generations. Assets in this trust are not subject to estate taxes upon the either spouse's death because of the unlimited marital deduction. This trust reports under a separate tax identification number.
Benefits of an AB Trust:
An AB Trust offers several benefits as part of a comprehensive estate plan. Here are some of the key advantages:
Estate Tax Minimization:
One of the primary benefits of an AB Trust is its ability to minimize or eliminate federal estate taxes. A significant portion of the estate can be shielded from estate taxes using the deceased spouse's estate tax exemption to fund the Bypass Trust (B Trust).
Utilization of Estate Tax Exemptions:
Each individual has an estate tax exemption, which allows a certain amount of their estate to pass tax-free. The AB Trust structure maximizes the use of both spouses' exemptions, effectively doubling the amount that can be passed to heirs without incurring estate taxes. Please note under current law, creating this trust is this is NOT required to preserve the deceased spouse's estate tax exemption amount (due to the concept of portability).
Income for Surviving Spouse:
The A Trust (Survivor's Trust) within the AB Trust structure is set up to benefit the surviving spouse during their lifetime. Additionally, depending on the terms of the trust, the surviving spouse may have access to income from the B Trust. This ensures that the surviving spouse has access to income generated by the trust assets and can maintain their standard of living.
Preservation of Wealth for Future Generations:
The B Trust (Bypass Trust or Family Trust) is designed to preserve wealth for future generations. By sheltering assets from estate taxes, more of the estate's value can be passed on to heirs, providing for their financial well-being.
Asset Protection:
The assets held in the Bypass Trust are generally protected from estate taxes, creditor claims, and other potential challenges. This protection helps ensure that the intended beneficiaries receive the maximum benefit from the estate.
Continued Control by the Grantor:
During the grantor's lifetime, they retain control over the assets in the Revocable Living Trust, including the AB Trust structure. This allows flexibility and adjustments, ensuring the plan aligns with changing circumstances.
Upon the creation of the B Trust at the first death, the deceased spouse has "control from the grave" - the assets that go into the B Trust cannot have the beneficiaries changed by the surviving spouse.
Privacy and Confidentiality:
The AB Trust, like other trusts, offers a level of privacy and confidentiality. Unlike probate, which is a public process, the details of the trust, including its assets and distribution plan, are generally private.
It's important to note that the benefits of an AB Trust depend on various factors, including changes in tax laws, individual circumstances, and estate planning goals. Consulting with legal and financial professionals is crucial to creating a tailored estate plan that maximizes the advantages of an AB Trust based on specific needs and objectives.
Execution of an AB Trust:
The execution of an AB Trust involves several steps, and following the provisions outlined in the estate planning documents is important. You will most likely need to work with an Estate Planning Attorney throughout the initial process.
Legal and Financial Consultation:
Throughout the process, and especially before making any decisions related to asset division, seek guidance from legal and financial professionals. They can provide insights into tax implications, legal requirements, and other considerations.
Review the Estate Planning Documents:
Start by thoroughly reviewing the provisions of the Revocable Living Trust. Look for the sections that specifically address the creation and funding of the AB Trust.
Confirmation of Trigger Event:
Typically, the AB Trust becomes relevant upon the death of the first grantor of the Revocable Living Trust. Verify that the triggering event, such as the grantor's death, has occurred if necessary.
Notification and Confirmation:
If necessary, notify relevant parties about the grantor's death, including the trustee, heirs, and any other individuals involved. Confirm the triggering event with appropriate documentation, such as a death certificate.
Identification of Trust Assets:
Identify the assets that are subject to the AB Trust. These assets will fund A Trust and the B Trust as specified in the estate planning documents.
Division of Assets:
In accordance with the provisions of the Revocable Living Trust, divide the assets between the A Trust and the B Trust based on the terms outlined in the documents.
Documentation and Record-Keeping:
Maintain detailed documentation of the asset transfers, including any deeds, account statements, or other relevant documents. Proper record-keeping is essential for legal and financial clarity.
Administration:
The trustee should administer the A Trust and the B Trust according to the terms specified in the estate planning documents. This may involve managing and distributing income from the B Trust to the surviving spouse while preserving principal in the B Trust for future beneficiaries.
Communication with Beneficiaries:
Communicate with beneficiaries and heirs to inform them about the creation and funding of the AB Trust. Keep them informed about the administration of the trusts and any relevant details.
It's wise for the surviving spouse to work with legal, tax, and financial professionals to work on funding the AB Trust. They can work with the surviving spouse or other designated individuals to carry out the provisions of the Revocable Living Trust and establish the AB Trust in a way that aligns with the deceased spouse's wishes and current legal requirements.
The steps listed above can vary based on the specific language and provisions of the estate planning documents, which is another valuable reason to seek professional advice from attorneys and financial advisors experienced in estate planning.