Archive for the ‘Law’ Category

Is an A/B trust right for you?

Sunday, February 22nd, 2015

The exclusive purpose of an A/B trust is to save money on estate taxes that the Internal Revenue Service assesses when a person passes away. This type of trust is only effective for couples who are married when they die. The A/B trust is a very useful estate planning tool that can be very beneficial to couples and their loved ones in a variety of ways.

A/B trust fundamentals

Thanks to an IRS tax rule stipulation, spouses can leave one another an unlimited amount of money when they die, without worrying about any estate tax obligation. This deduction allows the first spouse who dies to leave as much of their estate to the surviving spouse as they desire, free of tax. Then when the surviving spouse dies and the estate is passed on to their children or other heirs, the estate will benefit only from the tax exemption of the last spouse to die. Basically, the first spouse’s exemption is lost. The A/B trust preserves the exemption of the first spouse to pass away. So if the first spouse dies in 2015, up to $5.43 million can be put into an A/B trust. When the surviving spouse dies, the money in the A/B trust is not taxable.

In the beginning, the A/B trust is a simple revocable trust until the death of the first spouse. At that point, the trust is split into what are known as sub-trusts. Trust A is the survivor’s trust and trust B is the credit-shelter trust. The survivor’s trust will contain that person’s property interest and will remain revocable, with the surviving spouse controlling the trust. Typically, all assets in excess of the applicable exclusion – $5.43 million in 2015 – will go into the trust. The deceased spouse’s assets will go into the irrevocable credit-shelter trust. These assets can be passed along to heirs free of taxes, up to the amount of the unused applicable exclusion. This trust is designed to be a bypass trust that can be passed along from generation to generation without triggering any transfer taxes. This set up allows the surviving spouse to tap into the credit-shelter assets to suit his/her needs.

A/B trust benefits

An A/B trust has many benefits that include:

  • Doubles the lifetime exemption from federal estate/death tax.
  • Provides financial support for the surviving spouse after the first spouse dies.
  • The surviving spouse has access to the income of the trust for his/her lifetime. If needs such as health, maintenance, education and support arise, the surviving spouse is allowed to use the principal of the trust.
  • Children and other heirs will get the maximum benefits of the estate.
  • Prevents the surviving spouse from making any changes to the beneficiary choices of the deceased spouse.
  • Could help to avoid or lower the federal estate tax bite when the couple’s estate value at the time of the surviving spouse’s death is appreciably higher than originally expected.

While not all couples can benefit or will eventually need an A/B trust, those who think they don’t own enough to be affected by the federal death tax should find out if they will be subject to state estate tax. Also, while you may be under the threshold today, your estate will likely increase in value over the coming years and your family could be hit with a big tax burden. It would be best to review your estate with a qualified estate planner and determine if an A/B trust is right for you.