What is an A – B Trust?

An A – B Trust is a trust that is designed to minimize estate taxes for married couples by splitting into two trusts upon the first spouse’s death. “A – B” doesn’t really tell you anything, so I prefer to use the term “credit shelter trust” – because this sort of trust “shelters” the first spouse’s individual estate tax credit (or exemption).

Here’s the problem it’s designed to solve: let’s say you and your spouse live in Massachusetts, where the state estate tax hits anyone with more than a million dollars. Together, your estate – including the proceeds of any life insurance policies owned by either of you – equals a million and a half dollars. You die, leaving $750,000 to your spouse. There is no tax, because of the unlimited exemption for legacies directed at a spouse. Your spouse is thrifty, a good investor, lucky, or all three, and dies with the other half intact, leaving a $1.5 million dollar estate – but only his or her individual $1 million exemption. Your exemption was lost when you left all of your money directly to your spouse. The additional half-million is now in your spouse’s estate, and is taxed.

If you have an A – B trust, however, upon your death a quarter million of your money goes into the “spousal” or “marital” trust for your spouse to access, no strings attached, and thus qualifies for the unlimited spousal deduction. The other half million goes into the “family” or “bypass” trust, which is cleverly written so your spouse can access it, but only if he or she runs out of other funds. This portion does NOT qualify for the unlimited spousal deduction, and so uses your individual credit. When your spouse dies later, that portion will go directly to your kids (or nephews, or whomever you directed), and will not be taxed as part of your spouse’s estate.

Under recent federal tax law changes you might be able to get the same result by filing an estate tax return on the first spouse’s death and claiming “portability,” but that doesn’t work for most State death taxes – including in Massachusetts. And credit shelter trusts can have other significant benefits, such as asset protection for the surviving spouse, and control over your tax credit (which has significant value) in the event your spouse remarries.

Trusts need to be customized for each client, and it is important to think carefully about WHICH assets to put into your trust. Sign up for one of my educational seminars here to learn even more tips and tricks about making life easier for your loved ones. Or, if you know it’s time to start planning (or review your old plan), sign up for a consultation with me here.

Best Regards,