The Tax-Saving Trust as Easy as AB…

Marriage involves a financial partnership as well as an emotional commitment. Over time, a married couple can accumulate significant joint assets. This is especially true for those who own and operate a business together. When one spouse dies, the passing of those assets to the other often involves steep estate value taxation.

The AB trust is a mechanism through which marital assets can be passed to a surviving spouse with maximum federal estate tax exemptions. One thing you cannot count on is the current estate taxation structure, as the changing of control of the different branches of government can bring changes in estate taxation. One misconception held by many is that the AB trust is only of value to those with exceptionally large estates. Any estate that is expected to reach a level above the current estate tax deduction can benefit from the AB trust.

The AB Trust’s Tax Advantaged Structure

Using the John and Jane Jones family as an example, here is how the AB trust can work to save a lot of money in estate taxes. The trust is set up so that the death of one spouse results in their children receiving the property in the trust. As the surviving spouse does not own the property in this trust arrangement, estate taxation on its value is avoided. It is required that the trust be set up so that the surviving spouse can use the property until their death.

Upon the death of the surviving spouse, under the terms of the trust, the property rights and benefits pass to the surviving beneficiaries. Because that spouse does not own the property, it is not subject to the estate tax upon their death.

What are the Surviving Spouse’s Rights?

Under the terms of the AB trust, upon the death of the first spouse the surviving spouse, while not owning the property, retains specific rights in the property. Their rights and benefits include:

  • Receiving interest income from the property.

  • Use of the property as their residence or other defined uses.

  • Spending from the assets for the support, health, maintenance, education, and standard of living of the surviving spouse.

These rights are held by the surviving spouse until their death, at which time the property in the trust is distributed to the defined beneficiaries.

There are Some Drawbacks to the AB Trust

The AB trust is irrevocable, no changes to be made after the death of the first spouse. Depending on the terms of the trust, the limitations on the surviving spouse’s use of the property can become an issue that causes disputes with the beneficiaries. The trust terms should be carefully constructed to clearly define the limited uses of the surviving spouse. Every possible significant situation should be addressed to limit problems later.

Attorney and accounting services are necessary in not only the setup of the trust but also in the settlement and distribution of the property; it can be expensive. Other expense is incurred in keeping up with tax law changes to adapt the trust terms in response to law changes. Paperwork, a tax ID number for the trust, and annual income tax returns are required.

Should You Consider the AB Trust?

The age of the couple, their combined assets, and whether they have children from previous marriages are some of the things to be considered in whether the AB trust is appropriate. The best approach is to start with an attorney and accountant to discuss your unique financial situation and the AB trust.

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