Do you Still Need Your Old AB Trust?

Do you Still Need Your Old AB Trust?

AB Trust

An estate plan is a valuable way to prepare yourself, your loves ones, and your property for the future, but do you know what options are the best for your situation? AB trusts were once a popular method to minimize tax burdens and prepare to distribute property to heirs. Are they always a good idea? Not necessarily. If you executed an estate plan in the past when this type of plan was more common, you might consider checking to see whether you still need it

What is an AB Trust?

An AB trust allows spouses to create an estate plan with the benefit of lowering estate taxes. Sometimes called bypass trusts or credit shelter trusts, AB trusts start as a single trust while both Settlors are still alive. Then, on the first death, the trust splits into two separate trusts to serve their purpose. They work like this:

The A trust, also known as the surviving spouse’s trust, is created and then funded with the assets of whichever spouse passes away first. This A trust remains revocable and amendable by the surviving spouse. The B trust, also known as the bypass trust, gets funded by the other spouse’s assets and is an irrevocable trust.

In scenarios where an AB trust is used, the second part – the B trust – is separate and shelters the estate from federal estate tax up to the amount of the estate tax exemption. The surviving spouse can use the assets in the A trust and the income from the B trust. Then heirs and beneficiaries receive the property in the B trust after both spouses have died. 

In the past, these trusts were more popular because the estate tax limit was very low; in the 1990s, it was as low as $675,000 per person, and creating the B Trust was necessary to preserve the exemption of the first spouse to die. The exemption slowly rose through the first decade of this century.

Now, the exemption is 12.06 million per person. You can see how this is no longer a problem faced by most consumers anymore

Why do couples create AB trusts? Estate taxes used to be the driving force behind married couples’ desire to establish some kind of trust for their assets. Shielding property from creditors is another popular reason for taking this estate planning step. Whatever your reasons are, you must be well informed on the benefits and disadvantages of this option. Working with an attorney or CPA for advice and a legal document preparer with specific expertise in trusts can save you time and money without compromising quality. 

What Should You Consider Before Creating an AB Trust?

While a decision this impactful will be primarily based on your personal situation and wishes, there are a few key considerations you may want to consider. Your tax liability should be calculated as one of the first steps in this process. You can do this by combining the value of all your property and assets; this includes land, homes, investments, bank accounts, life insurance policies, and most other property you own that has value. A total of over $12.06 million for each individual may be subject to estate taxes.

Who Needs an AB Trust, and Who Doesn’t?

In the past, AB trusts were necessary when performing estate planning on large estates. This isn’t the case any longer. Married partners often find that combining their estate tax exemptions is sufficient to reach this goal without resorting to complicated trust funding. Now, the most often-cited reason for establishing an AB trust is maintaining control of assets after the death of the first spouse. 

Consider your unique situation carefully before committing to an estate plan or trust. If you need legal document preparation or legal advice, it is best to speak with someone before it’s too late. Consider this example:

Chuck and Sandy are married and have a blended family; they each have children from previous marriages. They create a single trust, and their trust becomes partially irrevocable when Sandy dies. This means that Sandy’s kids are protected and cannot be cut out of the trust by Chuck because the terms limit Chuck’s ability to make changes. 

If your goal is to restrict your spouse’s ability to alter or revise an estate plan if you pass away first, then an AB trust could be useful. However, if you are like most people and want your surviving spouse to have the flexibility to make decisions after you die, a regular trust will likely work best for you. 

If you find that you have an AB trust and don’t want the burden of the administration needed after the first spouse dies, contact Guideway immediately. We’ll assist you in preparing a more straightforward estate plan that is more appropriate for your wishes.

At Guideway Legal, we prioritize careful listening and simple, straightforward processes. We want our clients to feel comfortable and know that we have their backs whenever they need expert guidance and legal document preparation. We also have a network of outside attorney referral contacts if you need legal advice. If you are looking for estate planning or other legal document services, you can get the help you need at Guideway Legal

Contact Guideway Legal Documents & Mediation Services to Create a Living Trust 

Life is unpredictable. If you want to ensure your family is taken care of if you pass away suddenly, create an estate plan today with help from Guideway Legal Documents & Mediation Services. If your estate is likely to be greater than $1 million and includes real estate, a trust can protect your assets and ensure they don’t fall into the wrong hands. Get in touch with us today!

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