What is an AB Trust?

A modern AB trust, having only existed since 1981, is a form of bypass trust that uses a couple’s marital estate and gift tax deductions, known as their unified credit, to reduce their large estate and avoid excessive estate taxes. An AB trust is ideal for couples with estates larger than 4 million dollars as it allows a gradual channeling of the money to the couple’s heirs without any tax consequences.

How to Draft an AB Trust

An AB trust entails two different trusts that form at the death of either spouse, ensuring a smooth transition of wealth for the surviving spouse. The first trust, an “A” trust is the surviving spouse’s trust. It will hold the bulk of the spouse’s wealth and will be directly transferred to the surviving spouse. The second trust, the “B” trust is created for the couple’s children and will be in the amount of that year’s annual exemption. This allows for a large lump sum to be removed from the surviving spouse’s estate without any estate taxes being paid.

Requirements for the A Trust

Trust A will be a deposit of all of the surviving spouse’s property and anything remaining in the deceased spouse’s portion that did not fall under the annual exemption. In order for this trust to be valid, two requirements must be met. First, the surviving spouse must receive all the income in this trust for life, and it must be paid to the spouse at least annually. This means that the trust funds can only go to the surviving spouse. No funds from this trust can be given by the deceased spouse to a charity, family, or friends.

Second, the surviving spouse must be given a general power of appointment exercisable during life and/or at their death. In other words, the second spouse has complete control over the trust, including the ability to assign who it will go to upon their death. This means that the surviving spouse has the freedom to remarry and leave the entire trust to their new family, should they decide to do so. This also means that the trust will provide income for life for the surviving spouse, whether on monthly, quarterly, or yearly basis.

Requirements for the B Trust

The B trust is given to the couple’s children. The funding for this trust is calculated using the deceased spouse’s annual exclusion amount. What is available for this trust starts with the legislated annual exclusion amount for that year and is reduced by the amount of any property transferring to someone other than the surviving spouse and any post-1977 taxable gifts. So, if the annual exemption amount is $500,000, but the couple wants to immediately leave $100,000 to their son to pay for his college, then only $400,000 will be deposited into the B trust.

The requirements for this trust are simple: The money cannot go to the surviving spouse, typically, the trust is given to the children in sprinkled amounts. For instance, the couple may wish to give each child an equal share of the interest of the trust from the previous year.

Getting Legal Help

If an AB trust sounds like a feasible option for your estate planning needs, contact an estate planning attorney for a consultation.