10 Things to Know About an A-B Trust

An A-B trust, also known as a bypass trust or credit shelter trust, is a common estate planning tool used by married couples to minimize estate taxes and protect assets for their beneficiaries. Here are ten important things to know about A-B trusts:

1. Purpose and Structure

An A-B trust splits into two separate trusts upon the death of the first spouse: the A trust (or survivor’s trust) and the B trust (or bypass trust). This structure helps manage the couple’s assets more effectively and minimizes estate taxes.

2. How It Works

• • Upon the first spouse’s death, the assets are divided between the two trusts.
  • The surviving spouse retains control over the A trust, which includes their share of the assets.
  • The B trust holds the deceased spouse’s share, providing income to the surviving spouse while preserving the principal for other beneficiaries.

3. Estate Tax Benefits

The B trust takes advantage of the deceased spouse’s estate tax exemption, reducing the taxable estate of the surviving spouse. This can significantly lower or eliminate estate taxes upon the second spouse’s death.

4. Income for Surviving Spouse

The surviving spouse can receive income generated by the B trust, ensuring financial support while preserving the principal for the ultimate beneficiaries, usually the couple’s children.

5. Asset Protection

Assets in the B trust are protected from creditors of the surviving spouse, ensuring they remain intact for the beneficiaries.

6. Control and Flexibility

The surviving spouse has control over the A trust and can use its assets as they see fit. However, they have limited control over the B trust, ensuring the assets are preserved according to the deceased spouse’s wishes.

7. Irrevocability

The B trust becomes irrevocable upon the first spouse’s death, meaning its terms cannot be changed. This provides certainty and protection for the beneficiaries.

8. Funding the Trusts

Proper funding of the A-B trust is crucial. This involves transferring assets into the trust during the couple’s lifetime to ensure the trusts operate as intended after the first spouse’s death.

9. Consideration of State Laws

State laws can impact the effectiveness and benefits of an A-B trust. It’s important to consult with an estate planning attorney familiar with the laws in your state to ensure the trust is set up correctly.

10. Professional Guidance

Setting up and managing an A-B trust can be complex. Working with an experienced estate planning attorney and financial advisor is essential to navigate the process and maximize the benefits for your estate and beneficiaries.