Many married couples set up an AB Trust, also called a Bypass Trust, as part of an overall estate plan to avoid or minimize estate taxes. In Illinois, an AB Trust uses ‘portability’ to increase the Illinois estate tax lifetime exemption from the current $4 million to $8 million for a married couple. The federal estate tax law allows a surviving spouse to use any unused estate and gift tax exemption after the deceased spouse’s death; this is called portability.
An AB Trust is a joint revocable trust created by a married couple to avoid probate and minimize estate taxes for the surviving spouse. After the death of the first spouse (A), an AB Trust would protect the second spouse (B) from probate and estate taxes. To create an AB Trust, each spouse must put their property into a trust and name someone other than their spouse as the final beneficiary of the AB Trust.
• The A Trust is also referred to as the Marital Trust, QTIP Trust, or Marital Deduction Trust.
• The B Trust is also called a Bypass Trust, Credit Shelter Trust, or Family Trust.
An AB Trust has benefits for the surviving spouse and beneficiaries of both spouses.
1. Avoid Double Taxation
An AB trust uses the estate tax exemption of the A spouse who died first. Assets left in the decedent’s trust will be passed tax-free to the remaining spouse B. The deceased’s trust is not part of the surviving spouse B’s estate for purposes of the estate tax. The surviving spouse can access funds in the AB Trust, and the assets in this trust will bypass their taxable estate after they die while they continue to live in their house and draw income from the trust.
An AB Trust is revocable, and either spouse can add or remove beneficiaries, change trustees, add property or sell trust property, or terminate the trust entirely.
Assets remaining in the B Trust after the serving spouse dies pass to the final beneficiaries without paying estate taxes.
There are many different benefits and some drawbacks to using an AB Trust to protect your estate for your spouse. An experienced estate planning attorney can advise you on the best options for your unique situation.
For more information about AB Trusts and how to protect your loved ones from probate and estate taxes, contact one of our lawyers today and schedule an appointment at 630-864-5835.
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