[FREE DOCS]
[Wills, Trusts]
[Sales, Miscell.]
[Leases]
[Employment]
[Partnerships]
[Business Docs]
[Real Estate]
[How This Works]


[Terms & Conditions]
[Copyright &
Trademark
]

If anyone has any suggestions or comments, please contact us here.




Legaldocs®
. . . . . . Legal Documents Online

Explanation of an A/B Trust
The purpose of an A/B Trust is to save estate taxes (death taxes) which are assessed by the IRS at the time of death. An A/B Trust only works if you are married at the time of your death. Here is how.
First some basics:
The federal government allows every person to give away, either through lifetime gifts or upon death a certain amount of money (currently $1,500,000) without being taxed. The $1,500,000 per person is increased to $2,000,000 in year 2006, and $3,500,000 per person in year 2009. This is known as your Lifetime Exemption. (Currently, the Lifetime Exemption will revert back to $1,000,000 per person in 2011, unless Congress permantly repeals the estate tax before then.

Any assets exceeding this (current) $1,500,000 are then taxed at a progressive Estate and Estate and Gift beginning at around 37%, with the highest rate around 48% of every dollar above $1,500,000.

Also, the Internal Revenue Code allows any married person to gift, or leave at death, to their spouse an unlimited amount of assets - millions or billions, it doesn't matter. This is called the Unlimited Marital Deduction.

Married couples typically have reciprocal Wills which give their property to the other spouse, with the assets going to the children after the Surviving spouse's death. This procedure wastes the first to die spouse's Lifetime Exemption, and "overfunds" the Surviving Spouse's estate. The use of an A/B Trust prevents this "overfunding of the estate", and uses both lifetime exemptions, effectively shielding $3,000,000 (this limit is being by using both spouse's Lifetime Exemptions.

(Obviously, the first to die spouse could easily provide in the Will that assets should go directly to the children, and not to the Surviving Spouse. However, this is usually (a) not desired, (b) not practical when the children are minors, young adults, or not even born, (c) assurance is required that the Surviving Spouse is adequately protected through his or her lifetime, and (d) avoids the high cost of probate.)

Here is what happens if Husband and Wife have no A/B Trust:
Assume the following facts:
Husband and Wife have assets worth $3,000,000. Husband dies, and leaves everything to Wife. This is the manner most married couples leave their property through their Will, so that the surviving spouse has use of all assets, and that at the surviving spouse's death all of the assets will be gifted to the couples' children. At Husband's death, there are no taxes due because of the Unlimited Marital Deduction.

Assume the Wife dies next year, with the Lifetime Exemption still being $1,500,000.

Wife dies leaving everything to her children. Of the $3,000,000, Wife's Lifetime Exemption protects $1,500,000, leaving the upper $1,500,000 subject to the Estate Tax over the $1,500,000 Unified Credit. At our current tax level, Wife's estate will have to pay tax on the $1,500,000, some $600,000 in estate taxes. The children get $2,400,000. Had the couple had an A/B Trust, there would have been no estate tax (see why below) and the children would have gotten the full $3,000,000.

What happened in this scenario is that Husband and Wife wasted Husband's $1,500,000 Lifetime Exemption. The couple has, what is called, overfunded Wife's Estate by wasting Husband's $1,500,000 Lifetime Exemption.

Here is what happens with an A/B Trust.
Same facts as above, with Husband and Wife having assets worth $3,000,000. Husband and Wife have an A/B Trust in which Husband and Wife hold all of their assets in trust for their own benefit during their lifetimes. The Trust can be revoked, modified, added to or amended at any time. Husband and Wife conduct their business and personal finances essentially as if the Trust were not in existence, except that their real estate holdings, securities and other assets are held in the Trust name.

At Husband's death, the Trust will be divided into two trusts; one trust we will call the Decedent's Trust and the other we will call the Survivor's Trust.

The Decedent's Trust will contain a certain amount of assets, determined by a formula, but not to exceed $1,500,000. Since we can place almost any type of assets into this Decedent's Trust, we will fund Decedent's Trust with the appreciating assets, such as securities, maybe a growing business, real estate, etc. The remaining $1,500,000 goes to the Survivor's Trust.

During Wife's lifetime, she does not own the assets in Decedent's Trust; however, she has access to these assets for her "education, support, health and maintenance". If the assets placed in Wife's Survivor's Trust are, or become at any time insufficient to maintain Wife in her accustomed manner of living, she has access to the funds in Decedent's Trust.

At Wife's death, the $1,500,000 that were attributed to the Husband are assets still owned by Decedent's Trust, and thus are not included in Wife's estate. When these assets pass to the couples' children, Husband's $1,500,000 Lifetime Exemption protects these assets from federal estate taxes.

The assets remaining in Wife's Survivor's Trust ($1,500,000 at her death) are also transferred free of tax because Wife is using her $1,500,000 Lifetime Exemption. As you can see, both Husband and Wife's Lifetime Exemption were used. The entire $1,500,000 is passed free of tax, and the children have $600,000 more than if their parents had not set up an A/B Trust.

As a last note, many couples do not think that their estate will exceed $1,500,000 at their death to justify the use of an A/B Trust. However, inflation has effectively pushed many estates' values above this benchmark. For instance, a house worth $150,000 ten years ago may be worth $1,500,000 now. Furthermore, a couple may have a life insurance policy which provides for a death benefit of $1,000,000, which will be included in the couple's estate. Property which may have a nominal value to the Husband and Wife may have an entirely higher fair market value when appraised by the IRS at its "highest and best use". The couple may get an unexpected financial windfall, such as lottery winnings, proceeds from a lawsuit, or inheritance. Thus, often a couples' actual estate at the time of the second spouse's death is much higher than first expected, and an A/B Trust is necessary to avoid or reduce federal estate taxes.

As a rule of thumb, with married couples it is most prudent to use an A/B Trust to anticipate all contingencies. There is no real downside, and there are existing or potential upsides to using a Marital Deduction Trust.

&[footer]