If you had an estate plan prepared in the 1990s or early 2000s, you’ve probably heard of “A-B trust planning.” But you may not know what that is. An “A-B trust” is a revocable living trust for a married person that splits into two shares upon the person’s death. The first share, the A Trust, is for the benefit of the surviving spouse. The second share, the B Trust, is primarily for the benefit of the children. The purpose of the A-B split was initially to take advantage of the deceased spouse’s estate tax exemption, which for much of the 1990s was at $600,000, increasing to $1 million in the early 2000’s. The exemption amount has increased substantially since that time and is at $5.45 million today. Notwithstanding the increased exemption amount, and a recently legislated concept called “portability,” allowing the surviving spouse to use the deceased spouse’s unused exemption, A-B trust planning is still important, for a number of reasons:
- Creditor Protection. In the classic, most simple type of estate plan, sometimes called an “I love you” plan, no asset split occurs on the first spouse’s death. Rather, the deceased spouse leaves everything to the surviving spouse with no restrictions on the surviving spouse’s access to the property. But the surviving spouse’s creditors can reach that property to satisfy their claims. An A-B trust plan, on the other hand, leaves only a portion of the deceased spouse’s property to the surviving spouse outright, and the balance to a “bypass” or “credit shelter” trust. The surviving spouse’s access to this latter trust is limited to that which is necessary for the surviving spouse’s “health, education, maintenance and support.” Access to each trust can be adjusted further, ensuring the surviving spouse is cared for up to a certain standard while limiting creditors’ access to the assets.
- Asset Preservation. Putting restrictions on the A and B Trusts ensures the deceased spouse’s property is used for the the benefit of the surviving spouse and the children. This is especially important if the surviving spouse were to remarry and then become incapacitated or predecease the new spouse, who may have no loyalty to the children. It can also help preserve assets for children if the surviving spouse is a spendthrift.
- Flexibility. Often accompanying an A-B trust scheme is a “disclaimer” provision, which gives the surviving spouse the option to “disclaim” all or any portion of property set to pass to the A Trust in favor of directing it to the B Trust. More beneficiary and creditor restrictions and tax planning uses exist in the B Trust.
- Tax Planning. Although the estate tax exemption amount is currently over $5 million per person, A-B trust planning is still extremely important for people with large estates. It allows them to get the full benefit of the deceased spouse’s estate tax exemption while taking advantage of income tax basis planning. Plus, tax laws can change at any time; and having the flexibility of an A-B trust can prove important for tax savings even for modest estates.
Some estate planners may tell you A-B trusts are a thing of the past. However, A-B trust planning, which is simply another name for split-share provisions upon the death of the first spouse to die, is extremely important for creditor protection, asset preservation, tax planning and general planning flexibility. Talk to us about our A-B trust planning options.
Tags: A trust, A-B trust, B trust, bypass trust, credit-shelter trust, creditor protection, estate tax exemption, family trust, marital share, portability, revocable living trust, surviving spouse, tax planning
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