The Nature of the AB Trust
August 18th, 2010 Filed under: Estate Planning — Estate Planning Author
One of the largest taxes you will face in this country is the estate tax. It is in a state of flux for 2010, but will return to a 55 percent rate for the 2011 tax year and beyond. That is a very high rate, so more than a few strategies have been developed to try to minimize the tax bit that can occur when someone passes on. The A-B Trust is one such strategy.
To understand how this strategy works, one must first understand some of the basic elements of the estate tax. The tax rate is usually very high, but it does not apply to everyone. This is because the internal revenue code includes an exemption amount that is applied before the tax kicks in.
Let’s say the exemption amount is one million dollars. This would allow the deceased person to pass along the first million dollars of their estate to heirs without paying any estate tax. That sounds like a lot, but keep in mind the value of a home, retirement accounts and any life insurance proceeds are all counted as part of the estate.
The good news is most couples get around this by simply passing everything to each other. There is no tax when this occurs. A husband can pass his entire estate to his wife without paying a dime. That being said, his exemption amount is lost. When his wife passes on and leaves money to the heirs, the million dollar exemption he had is not applied.
The A-B Trust is designed to “save” this exemption. It does this by creating two trusts upon the death of a spouse [they are set up before]. In a legal bit of sleight of hand, the “A” trust is then credit with enough assets to slightly exceed his exemption amount. The rest is put into the “B” trust that goes to his spouse. Upon the death of the second spouse, the money all passes to the heirs from both trusts and both his and her million dollar exemptions are applied. This creates a tax saving of $500,000 or so given the particular situation.
There are many different ways the A-B Trust is designed and used. If your total estate will exceed a million dollars including life insurance proceeds, speaking to a financial planner to learn more about tax strategies is a smart move.
Barry Milton writes about financial planning for UFCAmerica.com.
One Response to “The Nature of the AB Trust”
By Rocco Beatrice on Aug 22, 2010 | Reply
Why limit yourself to a $1M or $2M exemption when you can get unlimited protection from the estate tax with an irrevocable trust. In addition, it also gives you asset protection while you are alive.