What Is an AB Trust?

AB trusts were a popular type of tax-avoidance trust for many years. When the creator of an AB trust dies, his or her assets are split into two different trusts:

  • A Trust: Sometimes called a “marital deduction trust.” The surviving spouse or beneficiary has full access to the A Trust’s income and assets.
  • B Trust: Sometimes called a “bypass trust” or “family trust.” The surviving spouse can only access the income from this irrevocable trust. Once the surviving spouse dies, the B trust’s assets are transferred to children or other beneficiaries.

Importantly, only the A Trust is subject to federal estate taxes when the first spouse dies. And, if the A Trust’s value is less than the federal estate tax exemption, no estate taxes are owed at that time. (Since 2005, California has not charged an estate tax.)

However, the federal government made significant changes to its estate tax system in 2011, making the estate tax exemption portable between married spouses. In other words, if your spouse dies and does not use his or her entire estate tax exemption, the remainder (up to $5.49 million in 2017) is transferred to you. If you receive your spouse’s full estate tax exemption, you will not have to pay federal estate taxes if your estate is less than $11 million.

These changes make AB trusts less appealing than they were in the past. If you have an active AB trust, you may benefit from a restructuring of your estate plan.

Should I Keep my AB Trust?

AB trusts have always had several disadvantages:

  • Your spouse cannot fully access assets in the B or family trust,
  • AB trusts are costly to operate, and
  • AB trusts have separate tax filing and record-keeping requirements.

For some people, these disadvantages now outweigh the tax benefits of an AB trust.

However, some AB trusts still hold significant estate planning value. In fact you may still benefit from an AB Trust if:

  • You and your partner are not legally married,
  • You want to ensure that your children (especially children from a prior marriage or relationship) receive certain assets, or
  • Your estate’s value exceeds your combined estate tax exemptions.

If you have questions about your AB trust, contact an experienced trust lawyer. A lawyer can help you evaluate your current estate plan and make any necessary changes.

Revoking an AB Trust

If both you and your spouse are still alive, you can revoke an AB trust. The revocation process involves transferring trust property, drafting a legal document, and notifying all interested parties of the trust’s termination. Besides revoking your existing trust, you should also reassess your estate plan. For example, you and your loved ones may benefit from a living or revocable trust. Due to complexities of trust and estate law, you should always consult with an experienced trust lawyer before you start the revocation process.

Speak With an Estate Planning Attorney About Your AB Trust

While an AB trust was once a valuable part of your comprehensive estate plan, times have changed. If you have questions about your estate plan and your need for an AB trust, contact the Legacy Lawyers today for a confidential and personalized evaluation.