Can I
Benefit from an A-B Trust?
Avoiding Estate Taxes
In general, all estates are subject to estate tax. However, there are certain ways to avoid paying
estate taxes.
One way is to use the
unlimited marital deduction. The government exempts transfers between a husband
and wife from estate and gift taxes. This means that in most cases, whatever you
leave to your spouse will not be taxed.
In addition to the
unlimited marital deduction, the federal government gives everyone a “unified
credit.” The credit exempts the first $1 million (in 2002 and 2003) of your
estate from federal estate taxes. You can use your unified credit during your
lifetime to reduce or eliminate gift taxes; otherwise, it will be applied to
reduce estate taxes.
Unfortunately, those who
have an estate valued over the applicable exemption amount and who rely
completely on the unlimited marital deduction may not benefit from their unified
credit as much. Using the marital deduction at the first death merely postpones
estate taxes to the death of the surviving spouse. Then, when the surviving
spouse passes away, the estate tax burden may be unnecessarily large.
There are strategies you
can use that may save you a substantial amount in estate taxes. One of the most
widely used strategies is known as the A-B trust. This strategy can enable you
and your spouse to pass on up to $2 million (in 2002 and 2003) in assets —
free of federal estate taxes.
The A-B Trust
By using an A-B trust, you
will ensure that both spouses take advantage of the unified credit — once at
the death of the first spouse, and then again at the death of the second spouse.
An A-B trust can be set up
by establishing a living trust with an A-B provision. Upon the death of the
first spouse, two separate trusts are created. The assets of the surviving
spouse are transferred to the A trust, and an amount up to the exemption amount
of the deceased spouse’s assets is transferred to the B trust. This then
creates two taxable trusts, each of which is entitled to use the exemption.
The B trust is subject to
estate taxes. However, because of the unified credit, no taxes will be owed. The
surviving spouse maintains control over the assets of the A trust and receives
income from the B trust. Then, at the death of the second spouse, only the A
trust is subject to estate taxes because the B trust was taxed at the first
death. After the death of the surviving spouse, the B trust can continue for the
benefit of the grantors’ family, often the children. The trust assets can be
divided into separate equal trusts for the benefit of the grantors’ children
who will receive net income, and then at some specified age they will receive
the principal.
There are many
considerations involved with A-B trusts, and you’ll need the help of competent
legal counsel. However, the A-B trust can be an effective way to reduce estate
taxes and preserve family assets.
© 2003 Emerald Publications
