Are you considering an AB Trust as part of your estate plan? If so, you should understand all of the benefits and disadvantages before you and your spouse settle on this type of trust planning. We should first understand that AB Trust planning is primarily a method to minimize estate taxes and ensure both spouses have full utilization of their estate tax exemption. A second point is that AB Trust planning can be implemented in either a Last Will or a Living Trust. Finally, one key goal of estate tax planning for most families is to defer estate tax until the death of the second spouse.
Benefits
There are two main benefits to an AB Trust. First, if done through a Living Trust it can help your loved one’s avoid the hassle and cost of probate. If you have ever faced probate before, you will know what a blessing it is to avoid this prolonged process.
An AB Trust also helps to lower estate taxes. This could save your heirs a large portion of their inheritance. The reason an AB Trust is able to reduce taxes is because the marital estate is split in half. Each spouse retains his or her half of the assets and leaves those assets to the B Trust.
Upon the death of one spouse, property will be funded into the B Trust up to the tax exemption level. Assets above the exemption level will go into the tax deferred A Trust. This means no taxes will be due at the time of the first spouse’s death. When the second spouse passes away his or her half of the estate plus amounts in the A Trust will be subject to estate taxes.
Disadvantages
If the AB Trust plan is implemented through a Last Will, there will be a probate required after both deaths! That’s two probates.
An AB Trust can limit the remaining spouse’s access to half of the estate. The surviving spouse will have some benefits of the B Trust including earnings from interest and access to principal if needed for support and maintenance. He or she can sell or take property out of the Trust but has to place the proceeds or replacement property back into the B Trust. What the surviving spouse cannot do is give Trust B assets to a new spouse or spend the principal in a frivolous manner. That is generally consistent with the goals of our typical married clients.
In second marriages, an AB Trust may be a problem if your subsequent spouse and children are not close. Your heirs will have to wait to inherit until your spouse passes away. This could be an issue if your spouse is much younger than you and may live for many years more. It may be a good idea to create a separate inheritance for your children to ensure they have funds for their needs too.
AB Trust planning offers many estate planning and tax advantages, the primary one being fully protecting each spouse’s estate tax exemption. But, this is planning that requires the careful insights of an experienced estate planning attorney.
Larry Parman
Attorney at Law
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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