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AB Trust: A Comprehensive Guide for Estate Planning

Planning for the future of your estate can be a daunting task, but it is crucial to ensure that your assets are protected and distributed according to your wishes. One effective estate planning tool is the AB trust, which can minimize estate taxes and provide financial security for your loved ones. In this article, we'll explore the benefits of an AB trust, how it works, and when it might be the right choice for your estate planning needs.

At Heritage Law Office, our experienced estate planning attorneys will thoroughly review your needs and wants when planning your estate and provide an outline of your best options. Contact us online or at 414-253-8500 to schedule a free consultation today.

What Is an AB Trust and How Does It Work?

An AB trust, also known as a bypass trust or marital trust, is a type of trust that divides the assets of a married couple into two separate trusts – Trust A (the survivor's trust) and Trust B (the bypass trust). This arrangement aims to minimize estate taxes and provide financial security for the surviving spouse and other beneficiaries.

The Structure of an AB Trust

When the first spouse passes away, their assets are divided into two parts:

  1. Trust A: The surviving spouse's trust, which holds the surviving spouse's assets and the deceased spouse's assets up to the federal estate tax exemption amount.
  2. Trust B: The bypass trust, which holds the remaining assets of the deceased spouse.

The assets in Trust A are available to the surviving spouse for their use and benefit during their lifetime. The assets in Trust B are held in trust for the benefit of the surviving spouse and other beneficiaries, such as children or grandchildren. The trustee manages these assets and distributes income or principal according to the terms of the trust.

Advantages of an AB Trust

An AB trust offers several benefits for estate planning:

Estate Tax Savings

One of the main reasons couples establish an AB trust is to minimize or eliminate federal estate taxes. The bypass trust can help maximize the use of each spouse's estate tax exemption. When the first spouse passes away, their assets are placed into Trust B, up to the estate tax exemption amount. This allows the couple to effectively double their estate tax exemption, potentially saving hundreds of thousands of dollars in estate taxes.

Asset Protection for the Surviving Spouse

The assets held in Trust B are protected from the surviving spouse's creditors and potential legal claims. This can provide financial security for the surviving spouse while ensuring that the assets are ultimately distributed to the intended beneficiaries.

Control Over Asset Distribution

An AB trust allows you to specify how the assets in Trust B will be distributed after the death of the surviving spouse. This can be particularly beneficial for blended families or when there are concerns about the financial management skills of beneficiaries.

When Is an AB Trust Appropriate for Your Estate Planning?

An AB trust may be the right choice for your estate planning if:

  • You are a married couple with significant assets that exceed the federal estate tax exemption.
  • You want to ensure that your assets are protected for the benefit of your surviving spouse and other beneficiaries.
  • You wish to maintain control over the distribution of your assets after the death of the surviving spouse.

However, it's essential to consult with an experienced estate planning attorney to determine if an AB trust is the most suitable option for your specific situation.

Contact an Experienced Estate Planning Attorney

If you're considering an AB trust as part of your estate planning strategy, the knowledgeable attorneys at Heritage Law Office can help. We'll guide you through the process and ensure that your estate plan reflects your wishes while maximizing tax savings and asset protection. To schedule a free consultation, contact our estate planning attorneys by using the online form or calling us directly at 414-253-8500.

Frequently Asked Questions (FAQs)

1. What is the difference between an AB Trust and a simple living trust?

An AB Trust is a type of trust that caters specifically to married couples and seeks to maximize their combined estate tax exemptions. When the first spouse passes away, their share of the estate is transferred into Trust B (the Bypass Trust), potentially minimizing estate taxes. On the other hand, a simple living trust, also known as a revocable living trust, doesn't have the same tax minimization strategies. It is a legal document that appoints a trustee to manage and distribute a person's assets after their death, without the need for probate.

2. What are the potential drawbacks of setting up an AB Trust?

While an AB Trust offers several benefits, including potential estate tax savings and asset protection, there are also potential drawbacks. The structure of an AB Trust can be complex and may require more effort to maintain than a simple trust. There could be additional costs associated with managing two trusts after the death of the first spouse. Also, once the AB Trust is established, the surviving spouse may have limited access to the assets in Trust B.

3. Can an AB Trust be altered or revoked?

Typically, the terms of Trust A (the survivor's trust) can be altered or revoked by the surviving spouse, providing flexibility as circumstances change. However, Trust B (the bypass trust) is generally irrevocable after the death of the first spouse. This means the terms cannot be changed and the assets in the trust cannot be removed, providing certainty about the ultimate distribution of these assets.

4. Is an AB Trust suitable for all married couples?

No, an AB Trust is not suitable for all married couples. It is typically recommended for couples whose combined assets exceed the federal estate tax exemption amount. For couples with fewer assets, the cost and complexity of setting up and maintaining an AB Trust may outweigh the potential tax benefits.

5. How can an estate planning attorney help with setting up an AB Trust?

An experienced estate planning attorney can provide valuable guidance in setting up an AB Trust. They can help assess whether an AB Trust is the right choice based on your financial situation and estate planning goals. They can also help navigate the complex legal and tax aspects of setting up the trust, ensuring that your wishes are accurately represented in the trust documents, and that the trust is properly established and maintained.

Contact Us Today

For a comprehensive plan that will meet your needs or the needs of a loved one, contact us today. Located in Downtown Milwaukee, we serve Milwaukee County, surrounding communities, and to clients across Wisconsin, Minnesota, Illinois, and California.