An A-B Trust is a plan which actually creates two trusts at the death of the first spouse, and is a strategy intended to avoid as much estate tax risk as possible.
Each spouse has an estate tax exclusion amount of $5.45 Million, and laws have made unused exclusion amounts fully portable to the surviving spouse, but for our purposes here, most of the exemption will be used up. So a Bypass Trust will be created which uses some amount of the exclusion, and will take that money out of the estate of the surviving spouse. The spouse can still get some income from this trust and have some discretion and control of the principal amount, but cannot use the principal for themselves.
The idea is that the children of the couple are destined to receive the principal amount anyway but for the time being, and in consideration of the fact that the money might very well grow to a significantly larger amount before the death of the surviving spouse, the money is separated from his or her estate to avoid putting their estate over the exclusion limit.
So the remaining amount not included in the Bypass Trust, which is the B Trust in the A-B setup, will go either directly to the surviving spouse or into another kind of trust such as a Q-Tip trust (Qualified Terminable Interest Property trust), which designates that even if the spouse remarries, the recipients of the assets in the Q-Tip trust will be the children or designated beneficiaries of the first, deceased spouse and not any new children or step children that are products of the second marriage.
The A-B Trust is also known as a Credit Shelter Trust because it can separate a significant portion of the decedent’s assets from those which can be attached by creditors.
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