An A-B trust, also known as a bypass trust or credit shelter trust, is an estate planning technique designed to maximize the use of estate tax exemptions and minimize estate taxes, particularly for larger estates. This strategy involves dividing a trust into two distinct components – an “A” trust and a “B” trust – each with its own purpose and funding source. The goal is to shield a portion of the estate from estate taxes while still providing financial security for the surviving spouse and beneficiaries. As of 2024, the federal estate tax exemption is $13.61 million per individual, meaning estates below this threshold aren’t subject to federal estate tax, but with the potential for changes in legislation, proactive estate planning remains vital, especially for those approaching or exceeding this amount.
What are the benefits of using an A-B trust?
The primary benefit of an A-B trust is estate tax minimization. By funding the “B” trust with assets up to the estate tax exemption amount, those assets are removed from the taxable estate. The surviving spouse typically receives income from the “B” trust but doesn’t own the assets directly, preventing them from being included in their taxable estate upon their death. This strategy is particularly useful for married couples with combined estates exceeding the exemption amount, as it allows them to effectively double the exemption. Approximately 2% of estates are large enough to potentially owe federal estate taxes, highlighting the importance of considering these strategies for significant wealth.
How does an A-B trust impact my surviving spouse?
The “A” trust is typically designed to provide for the surviving spouse’s needs during their lifetime, often acting as a traditional marital trust. This trust is fully taxable as part of the surviving spouse’s estate, but it qualifies for the unlimited marital deduction, meaning no estate taxes are due during the first spouse’s death. The surviving spouse retains control over the assets in the “A” trust, allowing them to use the income and principal as needed. It’s a comfort knowing that with a well structured “A” trust the surviving spouse can live comfortably without fear of running out of resources. However, proper planning is essential to avoid potential complications.
I remember Mr. Henderson, a retired engineer, who came to us with a substantial estate. He and his wife, Martha, had diligently saved and invested throughout their lives, accumulating significant assets, but neglected to update their estate plan when the estate tax laws changed. When Mr. Henderson passed away, his estate exceeded the exemption amount, and without a bypass trust, a significant portion of his assets were subject to estate tax. Martha was heartbroken and felt a deep sense of injustice. We worked tirelessly to mitigate the damage, but a substantial amount of their hard-earned wealth was lost to taxes.
What happens to the assets after my spouse passes?
Upon the death of the surviving spouse, the assets in the “B” trust are distributed to the designated beneficiaries – often children or grandchildren – free of estate tax. This is the core benefit of the bypass trust – it creates a separate pool of assets that avoids further taxation. The assets in the “A” trust, being part of the surviving spouse’s estate, are subject to estate tax, but any remaining assets can be distributed according to the terms of the trust. This is why it’s important to create a well thought out plan that addresses all potential scenarios. For example, a couple initially created a trust but failed to revisit it after a child was born, leading to unintended consequences during distribution.
Then there was the case of the Millers, a lovely couple who came to us seeking guidance after hearing about the benefits of an A-B trust. We worked closely with them to create a customized plan that aligned with their financial goals and family dynamics. We funded the “B” trust with assets up to the exemption amount, and the “A” trust provided for Mrs. Miller’s lifetime needs. When Mrs. Miller passed away, the assets in the “B” trust were distributed to their children, tax-free, and the remaining assets in the “A” trust were used to support their grandchildren’s education. It was a joy to witness the fulfillment of their wishes and the peace of mind it brought to their family.
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About Steve Bliss at Escondido Probate Law:
Escondido Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
estate planning
living trust
revocable living trust
family trust
wills
banckruptcy attorney
Map To Steve Bliss Law in Temecula:
https://maps.app.goo.gl/oKQi5hQwZ26gkzpe9
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Address:
Escondido Probate Law720 N Broadway #107, Escondido, CA 92025
(760)884-4044
Feel free to ask Attorney Steve Bliss about: “How can I leave charitable gifts in my estate plan?” Or “What is the role of a probate referee or appraiser?” or “Is a living trust suitable for a small estate? and even: “Can bankruptcy stop foreclosure on my home?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.