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What is an AB Trust and Who Should Use AB Trust?

One of the lesser known trusts that people might be able to use to maximize their federal estate tax exemptions is called an AB trust. It is created by married couples, so it would be useful to many readers.

Normally, when one spouse dies passing on his/her assets in a last will and testament, the estate will be taxed heavily before the beneficiaries receive it. However, to avoid this steep estate tax, spouses can set up an AB trust, where each spouse leaves their property to an irrevocable trust.

That's the short version. Now the long.

Generally it is the case that when the first spouse dies, the beneficiaries (usually the couple’s children) named in the trust receive that spouse’s property.

But in an AB trust, the property is to be used for the benefit of the surviving spouse, who does not technically own the property.

It is only once the surviving spouse dies that all the property rights and benefits of the irrevocable trust pass to the surviving beneficiaries of the trust. Because the surviving spouse does not own the property, it is not subject to estate tax.

Setting up an AB trust this way keeps the portion of the surviving spouse’s estate that is taxable half of what it would be without an AB trust.

The ideal situation in which you would set up an AB trust is where you have great confidence in the decision making of your surviving spouse, because there are some powers that a surviving spouse has over the trust.

And who should use the AB trust? Usually, the best kind of married couple that should use the AB trust are those that are over 60 and do not have children from previous marriages.

If you are trying to find creative ways of avoiding the estate tax, consider the AB trust; but also understand its limitations.

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