AB Trust – Pros and Cons

The federal estate tax can be a great burden, and for this reason, some married couples consider getting an AB Trust to have an estate tax exemption when their partner dies. The amount of the estate tax exemption from a living AB Trust for this year ( 2009 ) is $ 3.5 Million, and the amount varies on the year of death of a spouse. Without this AB Trust, the wife or husband of the deceased person will pay taxes on the properties inherited, which can be a burden to many who are still suffering the grief of their loved one’s loss.

What is an AB Trust?

What exactly is an AB Trust? By the word itself, it’s dividing property ownership into A and B, where the couple owns equal value of assets. This is to avoid being heavily taxed for a huge amount by dividing their properties into smaller portions which are both eligible for tax exemptions. If both couples have $5 million worth of properties, they can split it in half, and be exempted from estate tax.

Revoking and Changing the Trust

Think of the AB Trust as a cake. Instead of having the whole, it’s slicing the cake in two and sharing it together. The AB Trust can be changed or revoked any time during the couples’ lifetime. For example, if the husband owns the A asset or property and dies this year, the first $3.5 million of his property is exempted from federal estate taxes. The wife can use this trust for her and her children’s benefit. If the amount exceeds $3.5 million, the excess amount goes into the B asset. The surviving spouse will not take legal possession of her husband’s property, but she can use it to get income or support. If the wife dies this year too, her children can inherit both properties tax-free.

Avoiding estate taxes can be achieved with AB Trusts, and before you sign up for one, you must know the advantages and disadvantages on using this type of trust:

AB Trust Advantages

1. AB Trusts make couple save on or escape federal estate taxes.
2. AB Trusts let the surviving spouse use his or her deceased partner’s property for his or her own benefit, like support, health, or education.
3. AB Trusts can make both deceased couples’ children inherit their properties tax-free.
4. The living spouse will receive income from his or her deceased partner’s property.
5. AB Trusts owners can have different beneficiaries to pass their assets to, completely tax-free.

AB Trust Disadvantages

1. The surviving spouse cannot sell his or her deceased partner’s property.
2. There is no assurance on the tax benefit, specially with the coming repeal on year 2010 where there is no estate tax exemption. Congress can change the estate tax laws anytime.
3. The AB Trust works against younger couples who can be tied up with the property and the cost of maintaining it if his or her partner dies soon.
4. The surviving spouse will be obligated to file a yearly trust income tax return.
5. There can be limitations on how the surviving spouse can use the deceased partner’s property, and he or she needs to keep separate records on both assets.

If you were married before and had children on your previous marriage, this trust will not work best for you since there will be conflict between your spouse and the final beneficiaries of the assets. You can always find legal assistance to make sure you get the best out of this living trust. Besides, the sole purpose of having filed an AB Trust is to avoid being taxed on your inheritance. As a general rule, you must anticipate all possible scenarios to make sure if this choice is the perfect solution for you.

RESOURCES:

Garber, Julie. “ What is an AB Trust? “ About.com.

http://wills.about.com/od/overviewoftrusts/a/abtrust.htm

LegalZoom.com. “ The AB Living Trust. “ http://www.legalzoom.com/living-trusts-guide/a-b-living-trusts.html

LegalHelpMate.com. “ The AB Living Trust Saves Taxes. “

http://www.legalhelpmate.com/news/living-trust-article-1.aspx

Legal Documents Online. “ Explanation of an A/B Trust. “ http://www.legaldocs.com/abexpl.htm