What is an AB Living Trust?

An AB trust can be useful where the combined value of your estate and that of your spouse is likely to exceed the individual unified tax credit ($3.5 million in 2009). Federal estate tax law provides that, for the 2009 tax year, no tax will be assessed on a person’s estate if the value of their taxable estate, at death, was worth less than $3.5 million. Where the value of that estate exceeds this amount, the excess is taxed at the current rate of 45%. While estate tax has been repealed in its entirety for 2010, in 2011 the estate tax assessment threshold is scheduled to decline to just $1 million.

Generally, one spouse or partner will leave their entire estate to the other spouse partly to allow the survivor to have the benefit of their assets and partly because the transfer is tax-free. However, if as a result of this transfer, the value of the surviving spouse’s estate ultimately ends up exceeding the unified tax credit at the time of his or her death, then estate tax will be payable on the excess. This charge to tax, or rather part of it, can be avoided with proper planning. The use of an AB trust is one such method that can achieve this.


With an AB trust, on the death of one of the spouses, the trust splits into two separate trusts – Trust A and Trust B. Trust A is commonly referred to as the "Bypass Trust," "Credit Shelter Trust," or "Family Trust." Trust B is commonly referred to as the "Marital Trust," "QTIP Trust," or "Marital Deduction Trust."


Assets equal to the value of the estate tax threshold amount are transferred to the deceased spouse’s Trust A for the benefit of the beneficiaries - usually his or her children. The remainder of the trust assets is transferred to Trust B. There is however one very significant caveat. The terms of the AB trust provide that the surviving spouse will become a “life beneficiary” of Trust A. As such, the survivor can have the use and benefit of the assets in Trust A for the rest of their life without being given complete ownership of any of it! The surviving spouse can therefore use all of the income generated from the property in Trust A for their own support and upkeep, but they cannot sell the assets or deal with them in any way.


When the surviving spouse dies, all of the trust property in both Trust A and Trust B is distributed to the beneficiaries in accordance with the terms of the AB Trust. As the deceased spouse’s share of the trust property was never transferred to the surviving spouse, the deceased spouse is still able to avail of the $3.5 million estate tax exemption. As such, the deceased spouses $3.5 million in Trust A can be passed on to his beneficiaries tax-free. Similarly, the surviving spouse’s (who is now dead incidentally) $3.5 million can also be transferred tax free to her beneficiaries. This, in essence, means that the beneficiaries, who are most likely the children of the couple, can receive a combined amount of $7 million tax-free – an amount which is far in excess of the amount which they would have received under the terms of a will or an ordinary living trust which contain no tax panning provisions.



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