How to Use an AB Trust

One of the biggest concerns for individuals and couples with a sizable estate is how to accomplish the transfer of assets upon death without incurring estate taxes.

Although you may not be able to avoid estate taxes altogether, by using an AB trust you may be able to substantially limit the amount owed in estate taxes.

The value of an estate is subject to the payment of estate taxes absent an exemption or exception. One exemption available is the Unlimited Marital Deduction. As the name implies, you are allowed to transfer an unlimited amount of assets to your spouse during your lifetime or upon your death. Many couples make the mistake of simply creating reciprocal wills that transfer assets to the other spouse upon death under the assumption that the surviving spouse will then pass down the assets to children or other loved ones upon his or her death. The problem with this plan, however, is that the surviving spouse cannot use the Unlimited Marital Deduction when passing down assets. This is where an AB trust becomes useful.

Along with the Unlimited Marital Deduction, each person is also allowed to transfer a certain amount in assets during his or her lifetime free from estate taxes under the Lifetime Exemption rule. The Lifetime Exemption limit is subject to change. Imagine that the Lifetime Exemption is currently one million dollars and that the total value of your combined marital estate is 2.5 million dollars. By creating an AB trust, you can essentially create two separate trusts. One trust will be funded with the equivalent of your Lifetime Exemption amount, or one million dollars. The assets used to fund that trust will be safeguarded until the death of your spouse. The remaining 1.5 million will be placed in the second trust for your spouse’s use pursuant to the Unlimited Marital Deduction. Upon the death of your spouse, he or she can then use the Lifetime Exemption to pass down one million dollars in assets free from estate taxes. The funds held in the AB trust can also be passed down free from estate taxes, effectually allowing you to also use your Lifetime Exemption. In this example, only $500,000 is then subject to estate taxes instead of $1.5 million had an AB trust not been used.

ABOUT THE AUTHOR: Richard B Schneider
Experienced estate planning attorneys Portland OR of the Law Offices of Richard B. Schneider LLC offers estate planning and business planning resources to residents of Portland OR.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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