Strategies for Tax Reduction: Navigating the Complexities of AB Trusts

Understanding AB Trusts and Estate Tax Benefits for Married Couples

At Wilson & Wilson Estate Planning and Elder Law LLC, we recognize the value in strategic estate planning for maximizing wealth transfer across generations. For affluent married couples, federal gift and estate tax exemptions present significant opportunities for tax savings, and the concept of "portability" allows couples to collectively shield assets worth millions of dollars from these taxes. While this modern approach often makes an AB trust, or bypass trust, less necessary, understanding this option remains crucial for certain estate planning scenarios.

The Mechanics of AB Trusts Under Prior Tax Regulations

AB trusts were a prevalent tool under former tax regulations, where individual estate tax exemptions were often underutilized due to standard bequests to surviving spouses, which are not subject to estate tax due to the marital exemption. However, this could result in a tax liability for the estate of the surviving spouse if the total assets exceeded their individual exemption.

For instance, let's examine Christine and Terry's situation. Back in 2009, when the estate tax exemption was $3.5 million, they had a $4 million estate. Upon Christine's passing in 2009, her $2 million became Terry's, with no estate tax due to the marital exemption. Yet, when Terry passed in the same year, estate tax was due for asset values above the $3.5 million exemption—45% tax on $500,000 in this case.

An AB trust could have diverted Christine's portion into an irrevocable trust, with no estate tax due since her estate did not surpass the exemption limit. Terry would benefit from the trust without owning its assets, averting additional estate tax upon his death.

The Advantage of "Portability" for Most Married Couples

Since the advent of portability in 2011, couples like Christine and Terry no longer face the same concerns. One spouse’s bequest to the other, and the second spouse’s death, would involve their combined exemptions, thereby greatly reducing the risk of federal estate tax liability. However, this requires the surviving spouse to file an estate tax return upon the first spouse's death to secure the unused exemption.

When to Consider an AB Trust in Your Estate Planning

Despite the relief provided by the increased personal exemption and portability, Wilson & Wilson Estate Planning and Elder Law LLC recognizes that AB trusts are still pertinent for specific circumstances:

  • Non-marital partnerships under state laws.
  • Ensuring that children from previous marriages inherit your assets while still providing for your current spouse.
  • Residing in states with additional estate taxes without the benefit of federal exemption portability.

Before deciding on an AB trust, it's important to consult with an experienced estate planning attorney, considering not only the advantages but also the potential drawbacks such as the surviving spouse's restricted property usage, additional costs like legal fees for asset division, trust tax return filings, and meticulous recordkeeping.

At Wilson & Wilson Estate Planning and Elder Law LLC, we are committed to guiding you through the complexities of AB trusts and other estate planning strategies. Our dedicated attorneys are ready to ensure that your estate planning aligns with your unique financial goals and family dynamics. We invite you to take advantage of our consultation by calling us at (708) 482-7090 to explore how we can safeguard your legacy.

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