A-B Trust
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 the ultimate beneficiaries, excluding the other spouse. When one spouse dies, the trust splits into two separate entities: the A Trust, which is the surviving spouse's trust, and the B Trust, which is the deceased spouse's trust.
Origin:
The concept of the A-B Trust originated in the United States, primarily to address high estate taxes. In the mid-20th century, U.S. estate tax policies prompted many families to seek legal tax avoidance methods, leading to the development of the A-B Trust. This trust structure allows couples to maximize the use of estate tax exemptions after one spouse's death.
Categories and Characteristics:
1. A Trust: Also known as the survivor's trust, it is managed and used by the surviving spouse. The surviving spouse can receive income and principal from the A Trust until their death.
2. B Trust: Also known as the bypass trust or credit shelter trust, it preserves the deceased spouse's assets and provides benefits to designated beneficiaries. The assets in the B Trust are typically not included in the surviving spouse's estate, thus avoiding further taxation.
Specific Cases:
1. Case 1: Suppose spouses A and B establish an A-B Trust. After A's death, the trust splits into the A Trust and the B Trust. The A Trust is managed by B, while the B Trust preserves A's assets and provides benefits to their children. This way, B can continue to use the assets in the A Trust, while the assets in the B Trust avoid further taxation.
2. Case 2: Spouses C and D set up an A-B Trust. After C's death, D becomes the beneficiary of the A Trust and continues to use its assets. Meanwhile, the assets in the B Trust are reserved for their grandchildren, ensuring these assets are not subject to further taxation.
Common Questions:
1. Q: Will the A-B Trust be affected if the surviving spouse remarries?
A: Remarriage does not directly affect the structure of the A-B Trust, but the surviving spouse may need to reassess their estate planning to balance the interests of the new spouse and the original beneficiaries.
2. Q: Is it expensive to set up an A-B Trust?
A: Setting up an A-B Trust can be relatively costly due to the need for professional legal and financial advice, but it can save a significant amount in estate taxes in the long run.
