An AB Trust, also known as a marital bypass trust or a family trust, is a type of estate planning tool commonly used by married couples to minimize estate taxes upon the death of one spouse. The trust is divided into two parts: the “A” trust (survivor’s trust) and the “B” trust (decedent’s trust). Upon the death of the first spouse, assets are split into these trusts based on a predetermined formula. The surviving spouse retains control over the assets in the “A” trust while still having access to the income and possibly some principal of the “B” trust. The main goal of an AB Trust is to maximise the use of each spouse’s estate tax exemption, ultimately reducing the overall tax liability for the couple’s heirs.
A trust that allows couples to reduce or avoid estate taxes. Each spouse puts his or her property in an AB trust. When the first spouse dies, his or her half of the property goes to the beneficiaries named in the trust – commonly, the grown children of the couple – with the crucial condition that the surviving spouse has the right to use the property for life and is entitled to any income it generates. The surviving spouse may even be allowed to spend principal in certain circumstances. When the surviving spouse dies, the property passes to the trust beneficiaries. It is not considered part of the second spouse’s estate for estate tax purposes. Using this kind of trust keeps the second spouse’s taxable estate half the size it would be if the property were left directly to the spouse.
This type of trust is also known as a bypass or credit shelter trust.
An AB Trust, also known as a bypass trust or credit shelter trust, is a type of trust arrangement commonly used in estate planning to minimise estate taxes upon the death of a spouse.
An AB Trust is typically created by a married couple. Upon the death of the first spouse, the trust is divided into two separate trusts: the “A” trust (or survivor’s trust) and the “B” trust (or bypass trust). The surviving spouse has access to the assets in the A trust while the assets in the B trust are held for the benefit of beneficiaries, often the couple’s children.
One benefit of an AB Trust is that it can help maximise the use of each spouse’s estate tax exemption, potentially reducing or eliminating estate taxes upon the death of the surviving spouse. Additionally, it allows for the preservation and control of assets for the surviving spouse and future generations.
AB Trusts are commonly utilized by married couples with significant assets who are concerned about minimising estate taxes and ensuring the orderly transfer of wealth to their beneficiaries.
While AB Trusts offer tax advantages, they can also be complex to administer and may require ongoing management and legal oversight. Additionally, changes in tax laws or personal circumstances may impact the effectiveness of the trust structure.
In many cases, an AB Trust can be modified or revoked during the lifetime of both spouses, provided they both consent to the changes. However, once one spouse passes away, the terms of the trust typically become irrevocable.
Assets in the A trust are usually available for the surviving spouse’s use during their lifetime, while assets in the B trust are held for the benefit of beneficiaries, such as children or other designated heirs, according to the terms specified in the trust document.
Creating an AB Trust involves drafting a legally binding trust document that complies with state laws governing trusts and estate planning. It often requires the assistance of an experienced estate planning attorney.
Remarriage of the surviving spouse can complicate the administration of an AB Trust, particularly regarding the distribution of assets to beneficiaries. Proper estate planning and trust provisions can address these concerns.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 29th March, 2024.
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