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Estate Taxes and A-B Trusts

The old adage goes that death and taxes are the only things that are for certain. Unfortunately, your estate will not be able to escape taxes at your death, either. But there are estate planning tools that may be able to reduce the amount of taxes owed by your estate, thereby preserving as much of your assets as possible for your beneficiaries.

One of these tools is the revocable living trust with an A-B provision. Sometimes referred to simply as a bypass trust or an A-B trust, these trusts allow married couples to maximize the benefit they receive from the unified credit against federal estate taxes. As of December 17, 2010, each person is allowed to exempt the first $5 million of their estate from the estate tax. Any amount above and beyond $5 million is taxed at a rate of 35%. With a properly drafted A-B trust, married couples can shelter up to $10 million from the federal estate tax.

For an A-B trust to work, a married couple should place the majority of their property in the trust, with each spouse having his or her own trust. The couple needs to divide their assets so that each spouse's trust has the same or close to the same value of assets. Jointly-owned property should not be placed in the A-B trust because this type of property passes to the surviving joint owner upon death automatically, circumventing the purpose of the trust.

At the spouse's death, the A-B trust will divide into two separate trusts: the A Trust and the B Trust. The first $5 million worth of the decedent's property will go into the B Trust. The assets in the B Trust can be used by the surviving spouse and any dependents, such as children. The $5 million in the B Trust is exempted from the federal estate tax.

Anything over the first $5 million will go into the A Trust. The assets in the A Trust can only be used by the surviving spouse. These assets also are subject to the federal estate tax, but the tax is deferred until the surviving spouse's death.

Upon the surviving spouse's death, the first $5 million of his or her estate will pass estate-tax free to the final beneficiaries. Any remaining amount in the B Trust also will pass estate-tax free to the final beneficiaries. However, the remaining assets in the A Trust will be taxed as part of the surviving spouse's estate. After the estate taxes are paid, any amount remaining is provided to the beneficiaries.

In order to receive the asset protection of the A-B trust, the surviving spouse has some restrictions on how he or she may use the trust property. This generally means that the spouse may only use the assets for support and maintenance in his or her accustomed manner of living. If the surviving spouse does not adhere to the use restrictions on the assets, the assets in the A-B trust could become taxable.

In addition to the limited use of the property in an A-B trust, other drawbacks include the record-keeping and tax filing requirements and administration costs associated with them. Also, some people, particularly young couples, disfavor having assets tied up in a trust rather than at their disposal.

If you are considering creating an A-B trust, be sure to work with an experienced estate planning attorney who can explain their advantages and disadvantages and help you determine whether this is the best tool to use to limit your estate's tax liability.

Preparing to Meet with Your Estate Planning Attorney

To read and print out a copy of the checklist, please follow the link below.

Preparing to Meet with Your Estate Planning Attorney

You can download a free copy of Adobe Acrobat Reader here.

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DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.

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The Fort Worth estate planning attorneys and probate lawyers at Bakutis, McCully & Sawyer, P.C. advise North Texas clients about wills and trusts, real estate transactions, business formation, probate administration and litigation, and marital property. Our wills and trusts lawyers serve clients in the Fort Worth-Dallas Metroplex, Tarrant County, Johnson County, Hood County, Parker County, Denton County, Wise County, Bosque County, Jack County, Hill County, Fort Worth, Dallas, Southlake, Colleyville, Arlington, Burleson, Granbury, Cleburne, Jacksboro, Hillsboro, Grandview, Bridgeport, and Weatherford, Texas.