What is A-B Trust?

622 reads · Last updated: December 5, 2024

An A-B trust is a joint trust created by a married couple for the purpose of minimizing estate taxes. It is formed with each spouse placing assets in the trust and naming as the final beneficiary any suitable person except the other spouse. The trust gets its name from the fact that it splits into two separate entities when one spouse dies. Trust A is the survivor's trust and trust B is the decedent's trust.

Definition

An A-B Trust is a trust established by a married couple to minimize estate taxes. Each spouse places assets into the trust and names appropriate individuals as ultimate beneficiaries, excluding the other spouse. When one spouse dies, the trust splits into two separate entities. The A Trust is for the surviving spouse, and the B Trust is for the deceased spouse.

Origin

The concept of the A-B Trust originated in the United States, primarily to address the issue of high estate taxes. In the mid-20th century, as estate taxes increased, many families began seeking legal ways to reduce their tax burden, leading to the popularity of A-B Trusts.

Categories and Features

A-B Trusts are divided into two parts: the A Trust and the B Trust. The A Trust is set up for the surviving spouse, allowing them to continue using and managing the trust assets. The B Trust is for the deceased spouse, typically used to protect assets from estate taxes. The advantage of the A Trust is that the surviving spouse can flexibly use the assets, while the B Trust's advantage is that assets can be passed to descendants without increasing the estate tax burden.

Case Studies

Case Study 1: Suppose a couple has $2 million in assets and sets up an A-B Trust. When the husband dies, $1 million goes into the B Trust, and the remaining $1 million stays in the A Trust. This way, the assets in the B Trust are not subject to estate taxes. Case Study 2: Another couple in California sets up an A-B Trust. After the wife dies, the assets in the B Trust are used to pay for their children's education, while the assets in the A Trust continue to be managed by the husband.

Common Issues

Common issues include: Is an A-B Trust suitable for all families? The answer is no; it is mainly suitable for families with significant assets who wish to reduce estate taxes. Another issue is whether setting up and managing the trust is complex. It indeed requires professional legal and financial advisors to assist.

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