In doing research for a client I came across these pieces of valuable information for couples with an AB Trust.

What is an AB Trust?

An AB Trust is one in which a family trust is divided at the first death into two trusts (the by-pass or credit shelter trust and the survivor’s trust). Many people use this type of trust for one of two reasons. The first and most common reason is to minimize the estate tax that is assessed when the second spouse dies. The second is to separate the assets at the first death to ensure the first to die has an estate that he or she can leave to his/her heirs but while the second spouse is still alive, he/she can use the resources to supplement his/her needs.

  1. AB Trusts create tax savings for estates large enough to incur estate tax. As of 2019, the federal estate tax exemption is $11.4 million. You read that right, $11.4 million per person. If your estate is greater than that, using a marital AB trust can reduce the federal estate tax due.
    • Because the new federal tax exemption is so high, many estates no longer have a need for an AB trust. While both spouses are still alive, it is possible to amend and completely restate your trust to eliminate the need for these sub-trusts and for the splitting of assets into these sub-trusts.
  2. Some financial advisors suggest that placing a home in the bypass trust is a good idea; however, here are three things to consider before making that decision:
    • Some banks will not make loans on property in an irrevocable trust and bypass trusts are irrevocable. If the surviving spouse may need access to the equity in the home either through a conventional or reverse mortgage, placing the home in the survivor’s trust may be a better idea.
    • You can exclude up to $250,000 of capital gains from taxation but only if you lived in the home for two of the five years before you sell it. HOWEVER, if the home is placed in the bypass trust, you may not qualify for that exclusion.
    • Many people believe that placing the home in the bypass trust will allow your children or other heirs to get the higher tax basis when the home sells at the second spouse’s death. However, the tax basis is based on when the property was placed INTO the bypass trust, not when the children or heirs inherit it (at the second death).

It is always important to understand the different choices and options and to seek both legal and tax counsel before making those decisions.

Our CLDP, Carol Aragon-Montgomery, is not an attorney or tax advisor and cannot give tax or legal advice, but she can provide you with the general factual information you may need to make an informed decision before implementing your estate planning documents.