AB Trusts for Couples

A trust option specifically designed to circumvent paying more than you and your spouse need to in taxes is called a credit shelter trust, or sometimes is referred to as an AB trust. In Chapter 7 you learned about the scale of estate values that are exempt from federal estate taxes until 2011. An AB trust is a version of a living trust that protects a surviving spouse financially, ensuring the ability to maintain the same comfortable lifestyle that had been enjoyed as a couple. When the second spouse dies, the children or other beneficiaries receive the benefits of the trust property.

How AB Trusts Work

The way to keep the assets moving from spouse to spouse and then on to beneficiaries, which triggers an estate tax liability, is by having the assets move within trusts. When the AB trust is first set up, each spouse names the beneficiaries who will ultimately receive the property in the trust after the second spouse passes away. The children are usually named as beneficiaries in a family, although other people or favorite nonprofits could also be included. When the first spouse dies, the surviving spouse does not actually take ownership of the deceased's estate. It is held in trust. The surviving spouse, although he does not own it, can use the property, and carry on with life. The decedent's irrevocable trust will be a standalone entity, and as such will need its own taxpayer ID number. Separate records will have to be kept for it.

One aspect of an AB trust that couples need to keep in mind is that once the first spouse dies, the decedent's trust becomes irrevocable. No more changes are allowed after that point, but decisions have to be made regarding which assets go into the now irrevocable trust and which assets remain in the surviving spouse's revocable living trust.

Determining Whether an AB Trust Is Right for You

In some circumstances an AB trust is not a perfect fit. Generally, younger couples would be better off waiting before setting up an AB trust because of the irrevocable aspect at the first death. This depends on their assets and distribution goals. If children are involved, it is a surefire way to keep their joint assets flowing to their children and eliminate the concern that if the survivor remarries their marital assets might not make it to their children. Likewise, if there is a great age disparity it might not be a good idea to lock up assets for a younger spouse who could live a long time beyond the older spouse.

If there are children from a prior marriage, there could be some arguing within the family if the surviving spouse makes decisions about the deceased's assets that are not warmly received by their offspring. The important thing to keep in mind when a couple chooses to create an AB trust is that it has no benefit for either of them directly. It is a decision made to preserve more assets for their heirs. So if you are considering one and get some argument from your offspring — should you even share with them your plans — remind them of your generous heart.

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