As the AB Living Trust an Out of Date Tool?

When preparing an estate plan, there are many different factors to be considered. This can include tax implications and when beneficiaries will be able to access their portion of the estate. The AB living trust is one of the best avenues to accomplish goals for those who want to protect their assets and avoid paying estate taxes.

What is an AB Trust?

An AB living trust is a joint trust often set up for married couples. It controls how the property will be divided after the death of a spouse. The primary objective of an AB trust is to help the surviving spouse avoid paying the estate taxes after their partner’s death.

At death, the trust gets divided into two different trusts. One trust (A) is a revocable one in the name of the surviving spouse, and the other (B) is irrevocable and in the name of the deceased spouse. The surviving spouse can access income during their own lifetime from the irrevocable trust (B). The revocable trust (A) can be modified anytime by the surviving spouse, meaning they can access the principal and income. However, after the second spouse dies, the principal of the joint trusts will be held for beneficiaries.  

The Goal of AB Trusts

The AB trust was designed to decrease the federal estate tax a surviving spouse would pay after losing their spouse. After the death of the first spouse, the share of the trust of that spouse passes through to an irrevocable trust. This is because legally, the surviving spouse never owned that property.

AB living trusts were very helpful in the past in decreasing estate taxes when the federal gift and estate tax exemptions were relatively lower. The estate and gift tax exemption is currently $11.4 million per individual, up from $11.18 million in 2018. Anything valued at less than this amount is exempt from federal estate taxes. This makes AB living trusts more valuable and useful in reducing taxes owed.

Are AB Trusts Out of Date?

Short answer, no. In most situations, an AB trust is still very useful. If you want to make sure that only certain individuals inherit a portion of your estate, then this arrangement is particularly helpful because your spouse cannot alter the beneficiaries of the irrevocable part of the trust. In this way, the AB trust preserves at least a portion of the deceased’s estate. This keeps a spouse from using it or spending it in any way other than what the deceased spouse intended.

AB trusts are also useful for people in a second marriage who want to preserve assets for their kids. In an AB trust, the surviving spouse can receive the benefits from property in the irrevocable trust. However, the remainder of it can be routed to the children of the deceased spouse upon the death of the second spouse.