Gregory S. DuPont
An Overview of Asset Preservation with A/B Trusts
Asset preservation goes hand-in-hand with wealth accumulation. The Federal estate tax law makes planning your estate and staying abreast of legislative changes essential. Every estate may exclude a certain amount of property from estate tax, and in 2013, that amount is $5.25 million for individuals and $10.5 million for married couples (adjusted annually for inflation).
Thanks to the unlimited marital deduction, assets that are passed to a surviving spouse do not incur any estate taxes. But, estate taxes would be owed on the portion of the estate that exceeds the applicable estate tax exemption amount, which is $5.25 million in 2013. To maximize the exemption for both spouses, an A/B Trust would preserve the estate exemption of the first spouse to die while allowing the surviving spouse to use the exemption, in effect increasing the amount exempted from the estate tax.
When the American Taxpayer Relief Act (ATRA) of 2012 passed into law in January 2013, however, the exemption amount was permanently extended to $5 million (indexed annually for inflation), and the Federal estate tax rose to 40% in 2013, excluding many married couples from having to pay the Federal estate tax. In addition, ATRA allows a surviving spouse to use the deceased spouse’s unused exemption amount, along with his or her own exemption amount up to $10.5 million in 2013.
But you may still want to consider an A/B trust as a viable option because many states have their own estate and/or inheritance taxes. An A/B trust could preserve a married couple’s state estate tax exemption, shelter appreciated assets, offer creditor protection, as well as benefit children from a previous marriage.
Setting Up A/B Trusts
After the death of the first spouse, two separate trusts would be set up. The assets of the surviving spouse would be transferred to the A trust, and an amount up to the estate tax exemption of the deceased spouse’s assets would be transferred to the B trust; therefore, setting up two taxable trusts, with each trust entitled to use the exemption.
The B trust is subject to estate taxes, but with the applicable exemption, no taxes would be owed. The surviving spouse manages the A trust’s assets and receives income from the B trust. Upon the death of the surviving spouse, the A trust would be subject to Federal estate taxes, while the B trust may continue for the benefit of the grantors’ family. For example, assets may be divided into separate equal trusts for the grantors’ children, who can then receive net income, and at a specified age, receive the principal.
In certain circumstances, the A/B trust arrangement can be an effective estate planning technique to help both spouses use their estate tax exemptions. But A/B trusts, tax rules, and regulations are also complicated. This is but one of a variety of strategies available to help protect family assets. Be sure to consult your estate planning team of advisors for more information about A/B trusts.