When you’re considering the options for your California estate plan, you’ve likely placed great thought into creating a trust. There are several trust options available. Choosing the right trust depends largely on your specific needs. In this post, we’re going to explore AB trusts so that you can decide if this type of trust is right for you.
What Is an AB Trust?
An AB trust, also known as an A-B trust, is a joint trust that is created by a married couple. Its purpose is to help lessen estate taxes. Its known as an AB trust because of how the trust splits into two parts when one of the spouses dies.
While both couples are alive, each spouse places assets within the AB trust. They must also name a final beneficiary that is not either spouse. The first part of the trust, A, is the survivor’s trust. This is the trust that will help support the surviving spouse. The second part of the trust, B, is the decedent’s trust. When the surviving spouse passes away, the assets in this trust are given to the final beneficiary.
What Is the Purpose of an AB Trust?
In addition to holding assets in a trust for the surviving spouse and final beneficiary, an AB trust also helps married couples eliminate some of the taxes that may apply. The trust helps married couples make the best possible use of their federal exemptions. While there is some portability when it comes to the federal estate tax, an AB trust still holds an important role in California estate planning. They are beneficial in second marriages or where there are children who were born outside of the current relationship to either or both spouses. It can help ensure that the spouse and others are taken care of instead of fighting over assets in probate court. An AB trust also helps couples minimize the generation skipping transfer tax.
Related: 5 Ways to Simplify the Probate Process in California
Who Is an AB Trust Right For?
AB trusts are primarily used by individuals with large estates. Generally, they’re used by couples who have a legally recognized marriage. Having a legally recognized marriage isn’t necessarily a prerequisite for creating this trust. However, a legally recognized marriage is required for portability for federal exemptions.
As mentioned earlier, an AB trust is also a useful tool if either or both spouses have one or more children from a previous relationship and they want to make sure that their children inherit. Of course, if you’re concerned about keeping assets protected for your children because your spouse has their own assets or simply because you want to leave everything to your children, you should consider a bypass trust.
Related: Estate Planning Checklist: 10 Things You Don’t Want to Forget
What’s the Downside of an AB Trust?
Like any California estate planning tool, AB trusts also have downsides. The surviving spouse will have limited rights to the assets in the trust. The surviving spouse will need to hire an accountant or estate planning lawyer to properly divide the assets between A and B. Proper division of the assets is crucial because it can impact taxes. Tax returns must be prepared for the trust account each year. Separate records must be created and maintained. And tax laws change on a fairly regular basis. How those laws change could have serious consequences on your trust and your estate.
To find out more about AB trusts and other California estate planning essentials, set up an appointment with an experienced estate planning lawyer.