When a couple gets married, they should remember that they can draft a specific trust to minimize their estate taxes. An AB trust, also known as a credit shelter trust, involves creating two separate documents after one spouse passes away.
First, the portion of property owned by the spouse who passed is put into the bypass trust (B). This arrangement passes the property to beneficiaries like the spouses’ children upon the surviving spouse’s death. It also cannot be revoked. As for the surviving spouse’s assets, the remainder will be put into trust A. The surviving spouse can continue to access, control, and use this trust however they wish.
If you are interested in this option, our hardworking estate planning lawyers could help draft an AB trust that adheres to legal regulations.
One of the largest benefits of an AB Trust is that, since they avoid double taxation of a set of assets, can help a couple bypass and defer estate tax exemption amounts. For example, a surviving spouse could add the estate tax exemption from the deceased spouse to maximize their estate tax exemption and possibly avoid or minimize overall estate taxes. Another benefit is that even though trust B is irrevocable, a surviving spouse is still usually able to draw income from the arrangement and live in a family house, as long as the second document offers this permission.
Unfortunately, there are some drawbacks to consider when thinking about drafting an AB trust with a partner. AB Trusts were originally produced to reduce estate taxes between couples, but in many cases, this might no longer be necessary – the federal government provides for a lifetime estate tax exemption which is currently $12 million. Additionally, AB trusts also limit the ability for the surviving spouse to use the deceased spouses’ assets. Therefore, a family should think carefully about whether this type of estate planning is right for them. In general, these arrangements might be best for blended families with children from previous relationships or those that may want to maximize estate tax exemptions if they have larger estates.
AB trusts can be an excellent option for families who want to protect their assets in the event of a spouse passing away. While they are not without their unique nuances and complications, they could help your family avoid substantial tax liability. Therefore, you should meet with one of our dedicated attorneys and discuss whether this option would work for your assets, property, and situation. To get started on planning for your future, reach out to us today.
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