An A-B trust is designed to minimize estate taxes. Created between spouses, this trust separates into two distinct parts upon the death of the first partner. Each spouse puts assets into the trust and names the final beneficiary. That individual cannot be their spouse. The name is a reference to the split that occurs upon the death of the first spouse. The survivor’s trust is trust A and the decedent’s trust is trust B.
The surviving spouse has limited control over the assets in their deceased partner’s trust. That control enables them to continue to live in their home and draw income assuming that this was stipulated in the original agreement. The survivor also retains total control over their own portion of the trust.
When the surviving partner dies the assets in A trust are passed to the beneficiary named. Since those funds and properties are not part of the B trust they are not taxed again for the purposes of estate tax. This avoids the risk of double taxation.
The real advantages of such a situation is that it potentially allows each trust to remain lower than the threshold for a taxable estate. With tax exemption portability it isn’t always necessary to count on the benefits of an A-B trust. Additionally, congress is always changing the limits and taxes on estates, so it really depends upon how large the trust will be at the time of death.
Such trusts can also complicate tax matters and record keeping, but are still valuable for some. Consulting with an attorney familiar with estate matters is recommended.
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