When a person dies, their assets are subject to estate taxes. Consider, for example, a married couple with a $20 million estate when one of the partners passes away. There are no taxes to be paid on the surviving spouse's entire $20 million because of the unlimited marital deduction for assets transferred from a deceased spouse to the next of kin. However, if one of the spouses passes away, their children will inherit the money. There will be an $8 million taxable element of the estate, which exceeds the $12 million exemption barrier in 2021 (12,060,000 exemption threshold in 2022).
A 40% tax rate means that $8 million will be taxed, leaving just $4.8 million for the recipients. Many married couples set up an A-B trust in their wills and testaments to avoid paying such high taxes. Instead, if the couple formed an A-B trust, the lifetime exclusion would prevent any estate taxes from being triggered upon the first spouse's death. However, the present exemption amount will be transferred into an irreversible trust known as bypass or B. There is also a term for this trust: trust in memory of the decedent $8 million will go into a survivor's trust, or an A trust, which the surviving spouse will have full control over. When the surviving spouse dies, the A trust's estate tax is not due until the decedent's death.
Advantages of an A-B Trust
The surviving spouse's property interests are contained in the A trust, but they have limited authority over the assets in the deceased spouse's trust. When it comes to B Trust, this limited control will still allow the surviving spouse to live in the family home and receive income from the trust, as long as these parameters are mentioned.
When one spouse passes away, the assets in their estate are shielded from taxes by a bypass trust, which can be accessed by the remaining spouse if necessary. For estate tax purposes, only the A trust assets will be liable to taxation when there is no longer any spouse left. This spouse's assets in the survivor's trust will be exempt from estate tax if the exemption threshold for 2021 is also $12 million (the exemption barrier for 2022 is $12,060,000).
The portability of the estate tax exemption is a classification that allows the federal tax exemption to be transferred between married couples. You can transfer any remaining estate tax exemption to your partner if you pass away before your spouse does, which will increase your combined estate tax exemption.
It is tax-free for the beneficiaries listed in a trust established by a deceased person to inherit their assets upon death.
Because the B trust uses up the first-deceased spouse's estate tax exemption, any funds in the decedent's trust will be transmitted to the next generation free of estate taxes. Double taxation is avoided since the decedent's trust is not deemed part of the surviving spouse's estate for estate tax purposes.
Net Worth and A-B Trusts
If the deceased spouse's assets falls below the value of their tax exemption, a survivor's trust may not be necessary. You can utilise IRS Form 706 to give your surviving spouse any remaining federal tax exemptions that your deceased spouse had accrued while you were married.
As a result of the trust's complexity, A-B trusts have fallen out of favour in recent years. As recently as the turn of the twenty-first century, estate taxes might have been levied on estates with a value as low as $1 or $2 million due to a lack of updating. It will climb to $11.7 million in 2021 and $12.06 million in 2022 for each individual's federal gift and estate tax exemption.
People with a net worth of at than $11.7 million will be allowed to take use of A-B trusts in the year 2021. One spouse can distribute up to $23.4 million of their late spouse's tax free status to their beneficiaries tax-free in 2021 and $20.78 million in 2022.
Are AB Trusts Obsolete?
Although estate law has evolved through time, AB Trusts aren't completely out of date. However, their usefulness has decreased significantly. This trust was originally designed to lower the estate taxes married couples would have to pay. Still, each individual is allowed a lifetime gift and estate tax exemption of up to $11.58 million from the federal government.
Is an AB Trust Irrevocable?
As long as one of the spouses in a married marriage is still alive, the terms of the trust can be changed. Part of the assets is then placed in a revocable trust for the surviving spouse, while the remainder is placed in an irrevocable trust on behalf of the deceased spouse. The revocable element of the AB Trust is the A portion, whereas the irrevocable half of the AB Trust is the B portion.
