Minimizing Your Estate Tax Using An AB Trust

If one of the spouses dies and passes on his or her assets in the last will, the estate will be heavily taxed before the beneficiaries ever receive it. Spouses looking to avoid this tax can set up an AB trust where they can each leave their assets to an irrevocable trust.

What is an AB Trust?

An AB Trust is a trust that married couples create to maximize federal tax exemptions. A common misconception is that AB trusts are only beneficial to those with large estates. However, the truth is that an AB trust benefits anybody that may owe estate tax.

How Does the AB Trust Work?

If one spouse dies, the beneficiaries named in that trust receive his or her assets. However, the irrevocable trust is used to benefit the surviving spouse that technically doesn’t own the property. One critical condition is that the surviving spouse can use the assets and he/she may spend principal in some instances.

If the surviving spouse dies, all the property benefits and rights of the irrevocable trust are passed on to any surviving beneficiaries of the trust. Since the surviving spouse is not the owner of the property, it does not attract estate tax. Using this approach to set up the AB trust keeps the taxable portion of the estate of the surviving spouse half of what it would be without it.

The Rights Of the Surviving Spouse Over the Assets

The benefits and rights of the surviving spouse include receiving all income from the trust including:

  • Use of the property
  • Interest
  • Spending to benefit his/her health, education, standard of living, and support and maintenance

The surviving spouse enjoys the rights until his/her death when all the property is distributed to the beneficiaries of the original trust.

The Drawbacks of the AB Trust

The AB trust is an irrevocable trust, which means that no changes can be made to the trust once one of the spouses dies. This has the potential to create friction between the beneficiaries of the trust and the surviving spouse. The rights of the surviving spouse to use the property will be limited.

It can be expensive to settle and distribute property in an AB trust and requires the services of an accountant and lawyer. Tax laws are constantly changing and hiring a professional is important to keep current on the changes and what they mean for the trust.

AB trusts require a lot of bookkeeping and paperwork. The surviving spouse needs a tax ID number for the trust and is required to file annual income tax returns on it. He/she is also required to keep records of the AB trust property.

The Bottom Line: Is the AB Trust the Right Option for You?

If you and your spouse are both over the age of 60 and don’t have children from previous marriages, the AB trust is ideal for you. If there are children from previous marriages, conflicts often ensue between the surviving spouse and the children of the deceased spouse regarding sharing of assets.

If you have more questions regarding AB trusts or think that it is right for you, you need to contact an estate planning attorney that will advise you based on your specific needs and circumstances.

Schedule Your Consultation with Our Experienced California Estate Planning Attorney

Celaya Law is an estate planning law firm in Napa, California. Attorney Anthony Celaya helps families in Napa, Sonoma, St. Helena, Calistoga, and the surrounding areas with setting up wills and living trusts, special needs planning, asset protection, probate administration, business law, and retirement planning.

Schedule a planning session with our experienced Napa attorney today to learn how we can help you and your family: (707) 492-3112.