AB Trust

AB Trust is also called a by‐pass trust or a credit shelter trust.

The purpose of an AB Trust is to help married couples avoid federal estate taxes by maximizing their allowable exemptions. Under a typical AB trust plan, one spouse leaves his/her separate assets and share of community/marital property to a trust (Trust A and Trust B) instead of to the other spouse. The surviving spouse receives the income earned on the assets of the deceased spouse's trust for life. The trustee is also directed to pay principal to meet the surviving spouse's need for "health, education, support and maintenance" during his or her lifetime.

Upon the surviving spouse's death, the remaining assets of the trust are distributed to the beneficiaries selected by the Trust Maker, typically his or her children. Because the assets of the trust never belonged to the second spouse, they are not counted as part of that spouse's estate for tax purposes.

Due to Federal Tax Laws in effect for 2011 and 2012, couples may not need to use AB Trust. Under the tax law, the surviving spouse is permitted to use any part of the total exemption of $10,000,000 (10.24 million for 2012) upon their own death. This feature is called "portability." Estate taxes have fluctuated greatly in in the previous decade adn current rates and exceptions should be consulted.

For example, Ashley and Tom have a combined estate worth $8,500,000 and each spouse leaves everything to the other. If Ashley dies in 2011, her $4,250,000 goes directly to Tom, who then has an estate of $8,500,000. No estate tax is due because of the marital exemption.

If Tom also dies 2011, his estate can use his $5 million personal exemption plus Ashley's unused personal exemption. Together those exemptions cover Tom's entire $8,500,000 estate and no estate tax will be due. Without portability, Tom's estate would owe tax on $3,500,000. To use the deceased spouse's leftover exemption; the surviving spouse must file an estate tax return when the first spouse dies, even though no tax is owed.

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AB Trust

Estate Planning Glossary