AB Trust: What You Need to Know

​AB Trust: What You Need to Know
Introduction

Trusts are an important tool for financial and estate planning. AB Trusts are a particular kind of trust. They are often used when a couple wants to control the distribution of their assets after the death of the first spouse to die.

This guide will explain the basics of AB trusts, how they work, and the benefits they offer.

What is an AB Trust?An AB Trust is a type of trust that allows the spouses/grantors to split the trust into two separate parts after the death of the first spouse. These two parts are known as Trust A and Trust B.


The surviving spouse’s assets are transferred to Trust A (usually called the Surviving Spouse’s Trust); while the decedent spouse’s assets are transferred to an irrevocable bypass trust. The surviving spouse then has access to income ​produced by assets in the Bypass Trust, and potentially some income.


Upside

• The decedent spouse can plan to prevent the surviving spouse from spending down the decedent’s half of the community property. The decedent spouse can plan for their children to receive the assets upon the death of the surviving spouse.
• The children of the decedent spouse have remedies against the surviving spouse should they spend down the assets in the bypass trust.
• Asset protection for the assets held by the bypass trust (if the trust is properly administered see below).

Downside

• The surviving spouse must take action upon the death of the decedent spouse. Surviving spouses often take no action. When I speak to surviving spouses who have this kind of trust, they often have no memory of setting this type of trust up.
• The surviving spouse walks into my office often 10+ years after the death of the decedent spouse, and has not done any administration.
• The couple loses the full power of the step up in tax basis at the death of the decedent spouse. This will likely lead to a big capital gains tax on appreciated assets such as houses.
• The children are sometimes waiting years for their inheritance.
• Previously, these were a very popular method for estate tax planning. It was the only way to capture the decedent’s unused estate tax exemption. This is no longer needed. Often, these types of trusts are more trouble than they are worth and can create tax liability for trust beneficiaries.

If you are looking for assistance in deciding whether a bypass trust is right for you, or if you have an old bypass trust that you want to restate, call my office to schedule an appointment (818 248 2183, or reach out below.