When creating an estate plan, it is important to consider all of your options. If you are married, you may want to think about an A/B Trust. This Trust will divide your assets into two shares – the “A” share and the “B” share, at the first of you or your spouse to die. Doing this may help you and your spouse circumvent probate and reduce taxes owed after the death of each spouse.

Taxable Estate

Do you have a taxable estate? In 2010 there is no estate tax exemption level, but in 2011 the exemption level is expected to be one million dollars. If you and your spouse currently have an estate worth more than a million dollars, an A/B Trust will almost certainly help reduce taxes owed upon the second of you to die.

Such a Trust allows you to divide your estate in half. When one spouse passes away, his or her half of the estate will pass into the B Trust, up to the maximum amount before estate taxes are owed. If the first half of the estate is above the tax exemption level, assets over the limit will go into the A Trust instead, where they can defer estate taxes until the second spouse passes away. In this way, both spouses get the opportunity to use their estate tax exemption equivalents (expected to be $1 million each in 2011 and thereafter). Stated another way, by using an A/B trust, you are able to double whatever the exemption is.

Remaining Spouse’s Needs

When you use an A/B Trust, you are limiting your spouse’s access to your half of the estate. Upon your death, if your spouse is the trustee of the B trust, your spouse can only use the B Trust for income from interest, to reside in Trust property, or for basic medical or daily care needs. The principle of the B Trust must be persevered for your heirs. Your spouse can, however, have full access to the A Trust.

Blended Families

If you are part of a blended family, an A/B Trust may have benefits and disadvantages. Each spouse can name his or her own heirs. If, however, the remaining spouse is still quite healthy and may live for many years, your children not have access to their inheritance for some time. An A/B Trust also ties your children to your spouse until your spouse passes away. This could be a problem if there is a lack of family harmony.

If you think that you may have a taxable estate or have a blended family and want to ensure that your assets go to your children, and not your spouse’s children or new companion after your death, we can help. Feel free to call to schedule a complementary appointment.

Tags: creating a trust, trusts