An AB Trust is an estate planning tool used by married couples that capitalizes on the unlimited marital deduction of each spouse.  The unlimited marital deduction means spouses can leave an unlimited amount of property to their surviving spouse with no Federal estate taxes.  An AB Trust allows spouses to double the amount they can leave to their children or other beneficiaries that will not be subject to Federal estate taxes.

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An AB Trust is an estate planning tool used by married couples that capitalizes on the unlimited marital deduction of each spouse.  The unlimited marital deduction means spouses can leave an unlimited amount of property to their surviving spouse with no Federal estate taxes. An AB Trust allows spouses to double the amount they can leave to their children or other beneficiaries that will not be subject to Federal estate taxes. If they do not use an AB Trust, the surviving spouse would then have a much larger estate, which could reach the Federal estate tax threshold, causing tax implications upon their passing.

An AB Trust sets up two ‘subtrusts’ for a married couple – Trust A and Trust B, and upon the death of the first spouse, the assets are divided with the current federal tax exempt amount placed in Trust B and the remaining amount placed into Trust A.  The surviving spouse has the right to use the property in Trust B for life and is entitled to any income it generates, and Trust A remains a revocable life trust within their control.

Subtrust B becomes an irrevocable trust upon the death of the first spouse, meaning the terms of that trust cannot be revoked or changed.  Since the surviving spouse does not legally own the property (because the trust is the owner), it avoids probate, and estate taxes, when the surviving spouse passes away.

Currently, barring any legislation or action from Congress, in 2011 the amount that will be exempt from the Federal estate taxes is slated to be just $1 million. Amounts in an estate which exceed that amount could be taxed at up to 55%.  Considering the value of a home, retirement account and other assets all combined, this may put many families in line to pay Federal estate taxes, making estate planning even more important.  Consult with a trust attorney or estate planning attorney to determine if an AB trust meets your family’s specific needs.



Source by Richard Schneider