The A/B Trust Simplified

First, in 2013, unless you and your wife have over $10,500,000 in your estate, you probably don’t need to worry about an A/B trust.  However, tax laws can change, and tax exemptions could be lowered in the future.  Also, as I’ve stated before, Portability may be used instead of an A/B trust to accomplish the same goals.  Nevertheless, sometimes an A/B trust is preferred, so what is it?

At its basic level, if you and your wife own assets as community property, upon passing of the first spouse (eg Husband) two separate trusts are created.  The first trust is commonly called a “Survivor’s Trust.”  You put the wife’s half of the community property, and all of her separate property if any, in the Survivor’s Trust.  You can put up to $5,250,000 of assets in the Survivor’s Trust.

Then you put the husband’s half of the community property, and all of his separate property into what is called a “Family Trust.”  You can also put up to $5,250,000 in the Family Trust.  Upon passing of the second spouse (eg wife) the assets in both trusts will go to your children tax free using both the Husband’s and wife’s “lifetime applicable exclusion amount.” (currently $5,250,000 each)

The A/B trust is much more complicated than this, but the above is the basic conceptual framework.  The goal of the A/B trust is to essentially double the amount of assets you can leave to your children tax free.  Or, put another way, if you don’t use the A/B trust, you would lose the first spouse’s applicable exclusion amount.

http://www.woodforkandassociates.com