An AB trust, or A-B trust, is a special type of trust that is created by a married couple. Its main purpose is usually to minimize the amount of taxes that are paid on an estate. An AB trust basically divides into two upon the death of one of the spouses. The trust is formed by each spouse placing their assets in the trust, and then naming any suitable person as the beneficiary besides the other spouse. 

AB trusts are named due to the fact that the trust splits into two when one of the spouses dies. Thus, “trust A” usually refers to the surviving spouse’s trust, while “trust B” refers to the deceased spouse’s trust.

How Do I Create an AB Trust?

When setting up an AB trust (also known as a “living trust with marital life estate”) each spouse will name final beneficiaries who will receive the trust’s property when the surviving spouse dies. 

It is common for the spouses to name the same people, such as their children, as final beneficiaries. However, this is not mandatory. Just remember to set up the surviving spouse as the recipient of the trust property from the AB trust so that legal ownership never fully occurs during the spouse’s lives.

What are the Rights of the Surviving Spouse?

The extent of the rights provided by the trust to the surviving spouse will depend on several factors. These may include the terms of the trust itself, state trust laws, and the limits set by the IRS. With maximum rights, the surviving spouse is generally entitled to all interest or other income from the trust property, as well as use of the property. Furthermore, they may spend the trust property in any amount for his or her health, education, support and maintenance, in his or her accustomed manner of living.

What are the Advantages to Setting Up an A-B Trust?

There are many advantages to setting up an AB trust. Generally speaking, the surviving spouse may only have limited control over the deceased spouse’s trust (the “B” trust). However, AB trusts still provide the following benefits:

  • The surviving spouse can still live in the marital home.
  • The surviving spouse can still draw income from the B trust (provided this is stated in the trust).
  • When the surviving spouse passes away, only the assets in their “A” trust will be subject to estate taxation.

Also, AB trusts are associated with a number of tax benefits, many of which may be somewhat complex. These may have to do with federal tax exemptions, transferability of these exemptions, as well as avoidance of double-taxation issues. For more information on the tax benefits of an AB trust, speak to a qualified accountant or a tax lawyer with experience in estate planning.

Are there Disadvantages to an AB Trust?

There may be some disadvantages to an AB trust including:

  • Use of the deceased spouse’s trust property may be limited or restricted;
  • May require accounting assistance to eliminate possible tax consequences when dividing property between the different trusts;
  • Tax returns must be filed in the general name of the trust; this may add extra work to your normal tax return efforts;
  • Separate records must be kept regarding the contents of the trust property; and
  • Tax code provisions can sometimes change prior to your trust taking effect. This may then require you to revoke the trust and create a new one (this is a concern for any trust in general, however).

Are there Situations Where I Would Not Want to Use an AB Trust?

There can be various situations where an AB trust might not be the ideal choice for a married couple. For instance, if one spouse is much older in age than the other, then saving on estate taxes might not be a priority, especially when one of the spouses is likely to live a considerable length of time beyond the death of the other spouse. Thus, it might not be worth it to go through the additional requirements associated with AB trusts.

Additionally, if the marriage involves children from previous marriages, then potential conflicts can arise. For instance, disputes can arise between the surviving spouse and the children of the deceased spouse from the previous marriage. 

This can lead to very complex legal disputes that intersect with other areas of estate law. Such situations may require the assistance of an attorney, who can help sort out the legal rights and duties of the various parties involved.  

Lastly, as mentioned, if there have been recent changes to the trust laws in your area, or if the laws are set to change in the near future, then you should factor this into your decision. It may be the case that you want to wait and see how the changes in law might affect your rights with regard to AB trusts and other trust types. 

Do I Need a Lawyer for Help with an AB Trust?

In many situations, administering an estate can be very complicated, especially if A-B trusts are involved. The person appointed to administer the estate may have tax issues or legal questions that need to be answered by a local lawyer or tax professional. An experienced wills, trusts, and estates lawyer in your area will know what to do, and help guide you through the legal formalities.