Can I Benefit from an A-B Trust

Retirement planning can be overwhelming unless you are a financial planner. One way to feel less overwhelmed with this process is by learning about different types of retirement planning that may be beneficial for you, or for your spouse. One of the most beneficial types for those who are married is the A-B Trust. This is also referred to by the name of credit shelter trust. The major benefit with this type of trust is that each spouse can qualify for an exemption on estate taxes.

Before the American Taxpayer Relief Act was put into place in 2012, there was a tax exemption to both spouses, but because most spouses left all assets to the surviving spouse, that individual would then qualify for only their tax exempt amount, despite the fact that the deceased spouse had never made use of their own exemption amount. The ATRA also raised the applicable extension amount to 5 million dollars and also increased the rate of federal estate tax to 40%. Additionally, this act made the deceased spouse’s tax exemption “portable” meaning that the surviving spouse could claim both exemptions. An A-B Trust is basically a living trust that helps to preserve the tax exemption for both spouses. Even though many benefitted from the ATRA with reference to federal estate taxes, there are still some states that collect inheritance or estate taxes. Couples who live in such states can still set up an A-B trust to make sure that they can get the tax exemption for both spouses.

With this type of trust, there are actually two trusts that are created. The first (A) contains the assets of the surviving spouse while the second trust (B) contains the assets of the deceased spouse, not exceeding the limits of the state tax exemption. Because there are now two trusts, each will qualify for it’s own exemption. The surviving spouse is then able to keep control of the A trust and get income from the assets in the B trust.

When the second spouse dies, only the A trust will be subject to federal estate taxes, as the B trust was already taxed when the first spouse died. With the new tax laws in place, many no longer need to set up an A-B trust. However, there are several cases in which it may still be beneficial. A few of these include:

  • Couples wanting to make sure their children will get their property – By setting up an A-B Trust, you can make sure that your surviving spouse will inherit after your death. You can also make sure that the inheritance will continue on to your children when your spouse passes away. This type of arrangement is especially beneficial in cases of a second marriage.
  • Those who owe estate tax to the state – Those living in a state that collects state estate tax will benefit from this type of trust as well. By doing so, both spouses will be able to qualify for an exemption on these taxes, instead of only the surviving spouse.
  • Couples who are not legally married – The beneficial changes made by the American Taxpayer Relief act so no good for couples who are in a long-term relationship, but are not married. An A-B trust that is set up properly can help to extend the same tax benefits to these couples.

Understanding all aspects of A-B trust is an Important part of the research and setup process. Make sure that you learn about upfront costs, administrative fees, tax rules and regulations. The best way to set up an A-B trust is by working with a reliable financial advisor. Contact Copelin Financial today to get the process of protecting your estate started. Our reliable advisors will take the time needed to answer your questions with understandable explanations. Once you have a firm grasp on the benefits of setting up an A-B trust, they will be ready to get everything in place so that you don’t have to worry about the future.

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