Trusts and estate plans can get incredibly complicated, so let us break the AB living trust down into its most basic moving parts.
AB living trusts are a two-part trust process involving the creation of an A trust (the marital trust) and a B trust (the bypass trust). Both trusts ensure that the wealth accrued by a couple over the decades spent together is not taxed. If taxed, it will be minimally and at the point of death via the estate tax exemption limit. This individual and joint exemption limit dictate how much a person (or a married couple) can leave behind without being taxed by the IRS.
An AB living trust is one of the more popular trusts of yesteryear. However, it has become less common in recent years because its primary function – to help couples avoid federal estate taxes – has become less of a worry for most Americans as estate tax exemptions have been massively expanded.
But these changes are temporary, and many families may utilize an AB living trust in the coming years to avoid a hefty tax rate on their children's inheritance.
In 2011, for example, the individual exemption limit on estate taxes was around $5 million per individual. It was even less in 2009 – just $3.5 million. But that changed over time. Today, the estate tax exemption limit is a whopping $12.06 million per individual or $24.12 million for married couples filing jointly. This means that if your total wealth left behind in assets – after funeral costs, legal costs, executor fees, final bills, outstanding debts, and so on – is less than around $12 million, you needn't worry about estate taxes, and by extension, the AB living trust.
But that might change in the future. So read on to learn more about how trusts work. An estate plan might be a good idea, even for a modest estate.
An AB or A-B trust is also called a joint trust. One cannot function properly without the other. AB living trusts are also exclusively used by married couples.
When first drafted, the AB living trust is one entity. It becomes two when the first spouse passes away. At this point, Trust A becomes the survivor's trust, and Trust B becomes the decedent's trust.
Imagine if the first spouse dies and leaves behind an estate of upwards of $20 million. Then they would incur hefty estate taxes on that wealth.
If the decedent spouse chooses to transfer their wealth to the surviving spouse, that spouse will enjoy a total marital exemption. However, they would still have to deal with having only an individual estate tax exemption to soften the tax hit when they eventually pass away.
Instead of taking that ultimate tax hit and distributing that estate among their heirs, the couple could have set up an AB living trust. When the first spouse dies, an X value based on the current year's exemption limit would be funded into Trust B, the irrevocable bypass trust.
The remaining amount goes to the survivor, or Trust A. Trust A will be under the complete control of the surviving spouse. The surviving spouse can still benefit from the wealth in Trust B but cannot access or amend it.
Trust B is subject to the decedent's estate tax exemption limit, which it is designed to match. Only Trust A will count towards the survivor's exemption tax limit. When the surviving spouse dies, the contents of Trust B and Trust A are transferred among the living. Trusts A and B will total the married couple's wealth without incurring any estate taxes. Or at least a minimal amount compared to having no estate plan.
The primary appeal of an AB living trust is to establish an irrevocable trust. This helps a wealthy married couple minimize or avoid estate taxes on their belongings. Furthermore, the AB living trust is mainly irrevocable. This means there's insurance for both spouses that neither can alter the trust after their partner dies. Your beneficiaries are effectively locked in.
The benefits of an AB living trust are irrelevant if your estate's value isn't near the current individual exemption limit. AB living trusts saw their heyday in the earlier 2000s when estate tax exemption limits were closer to $1 million or $2 million.
However, it would be irresponsible to say that estate planning professionals don't use ABdon'tts for the late 2020s. While most Americans don’t have don't about estate taxes, the number of families that do may change shortly.
Current estate tax exemption limits were raised in 2017 by the Tax Cuts and Jobs Act, but those provisions will only last until 2025 and then revert to pre-2017 levels. This may massively reduce the current estate tax limit and cause a lot of people to reconsider their estate planning.
AB living trusts may return if estate tax limits are once again reduced to turn-of-the-century levels or as a marital tool for asset protection. Irrevocable trusts separate wealth from an individual while remaining in the control of a trusted fiduciary. This means you can place wealth in protection from creditors and designate it for your children before you die.
An AB living trust is only part of a larger, more comprehensive estate plan. It can also make the transition from your passing easier for your loved ones. Contact a living trust estate planning professional to learn more. An estate planning professional at Werner Law, serving those in Bakersfield, Encino, and Lancaster, can help preserve your financial legacy
Founded in 1975 by L. Rob Werner and serving California for over 48 years, our dedicated attorneys are available for clients, friends, and family members to receive the legal help they need and deserve. You can trust in our experience and reputation to help navigate you through your unique legal matters.
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