First, an A-B trust is only needed for married couples whose estates are worth more than $2,000,000, the current federal estate tax exemption (in 2008). If your estate is worth less than $2,000,000, then you will not owe federal estate tax.

The A-B trust works by placing both spouses’ property interests in trust while they are living. Typically, both spouses remain trustees and may revoke or amend the trust at any time before their death. Since the trust owns the property and they do not, the spouses’ overall estate is divided and smaller for tax purposes, but the spouses’ retain most of the same rights of ownership. The trust property is split and may be distributed into a survivor’s share, a marital deduction share (usually a QTIP Trust), and a non-marital share.

When the first spouse passes away, up to $2,000,000 of the assets are placed into a survivor’s trust. This trust typically provides flexibility to the survivor, and has provisions for the distribution of trust principal and income to meet the survivor’s needs. At the death of the survivor, remaining assets from this trust pass to beneficiaries tax free.

After the first $2,000,000, the next $2,000,000 is distributed to the marital deduction share. The marital deduction share remains accessible to the surviving spouse, but if the spouse chooses to use it, the proceeds may be subject to tax. If not needed by the surviving spouse, then upon the surviving spouse’s death the assets transfer from the marital deduction share tax free to the remainder beneficiaries of the trust.

Finally, assets that exceed the $4,000,000 limit are placed in a bypass trust. Assets placed in this trust are subject to tax, but may still be accessible to the survivor if needed.

Filed under: Trusts