Comprehensive Tax & Legal Solutions

What to know about AB trusts and estate taxes

On Behalf of | Nov 12, 2017 | Estate Planning

Let’s say that you have set up a will in order to distribute your assets after you pass away. You decide that part of your estate will go to your spouse. After all, bequeathing assets and property to a spouse is an excellent way to care for them.

Still, if your estate is subject to estate taxes, they could seriously deplete the assets meant for your loved one. Every penny of your estate that goes to taxes is a penny that your spouse can’t use. If this is a concern for you, then you may be interested in an AB trust. In this post, we’ll discuss AB trusts and the role they play in minimizing your estate taxes.

How does an AB trust work?

An AB trust is a type of irrevocable trust that does not incur taxes. In the event that you should die, the beneficiaries named in the trust—usually your children—will receive your property. Your spouse can still make use of the property, but because he or she will not technically own it, it will not be subject to estate tax.

What rights will my spouse have?

The key purpose of an AB trust is to benefit the surviving spouse. Your spouse may therefore have significant power over the trust’s assets. They will also be entitled to some of its benefits, including interest, access to property, and financial support to maintain their quality of life.

Are there disadvantages?

There are some disadvantages to an AB trust:

  • Because an AB trust is irrevocable, it cannot be changed after you die. This can be complicated if the living situations of your spouse and children have changed since the date when you established the trust.
  • Such a trust could cause tension between your spouse and the trust’s beneficiaries.
  • If you and your spouse were used to freely sharing property with each other, they may feel restricted by the trust’s provisions.
  • Your spouse will have to keep a record of how the trust’s property is used.

Is an AB trust right for me?

If your estate will be subject to estate taxes, you are eligible for an AB trust. Generally, AB trusts are most suitable for married couples over the age of 60 who do not have children from previous marriages. Still, it is an appealing option for couples who wish to reduce estate taxes.