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AB Trusts Attorney in Manhattan

Establishing a trust is an important part of many of today’s estate plans. A comprehensive and well-written trust can help protect your assets and your beneficiaries, now and in the future. One frequently-utilized type of trust is an AB trust, which married couples use to manage marital assets after each spouse passes away.

Although not as popular today as compared to several decades ago primarily due to an increase in the estate tax exemption and the ability to “port” a deceased spouse’s unused exemption, it nevertheless still provides planning opportunities where state estate taxes, such as that of New York, are not in synch with federal rules.

AB Trusts are a form of “Credit Shelter” or “By-Pass” planning discussed in greater detail in a previous blog post, including examples and as to whom the estate tax applies, accessible here.

The team at Chaves Perlowitz Luftig, LLP reviews the basics of AB trusts below and how you can determine whether an AB trust may be right for you. To learn more, continue reading or contact us to get started with your free initial consultation.

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What Is an AB Trust?

A trust is a formal fiduciary relationship between a trustee and a trustor. A trustor establishes a trust to grant a designated trustee the right to manage the trustor’s properties or other assets on behalf of a third party known as a beneficiary.

Trusts are designed to protect the trustor’s assets, ensure the trustee properly distributes assets to the trustor’s beneficiary, and avoid the probate process. Trustors can use trusts to designate how their assets are handled during their lifetime and/or after they die.

There are many different types of trusts, including AB trusts, also known as bypass trusts. AB trusts are joint trusts explicitly intended for married couples who want to formally establish how their assets should be handled after one spouse passes away. An AB trust also helps spouses avoid having their assets subjected to double taxes after they both die.

How Do AB Trusts Work?

An AB trust designates how a married couple’s assets are distributed after each spouse dies. After the first spouse passes away, the AB trust is split into two separate trusts, often referred to as Trust A and Trust B. Any assets in the deceased spouse’s name go into an irrevocable living trust, while any assets in the surviving spouse’s name go into a revocable living trust.

As the name implies, an irrevocable trust is a trust that cannot be altered or revoked after it is established. On the other hand, a revocable trust can be modified or revoked at any time during the trustor’s lifetime. Assets in an irrevocable trust are not subject to taxation, which can help the surviving spouse and other beneficiaries avoid or reduce their overall tax burden.

Let’s say a married couple establishes an AB family trust while both spouses are still alive. When Spouse A passes away, their share of any assets in the AB trust automatically passes into an irrevocable living trust in Spouse A’s name. Meanwhile, the share of the assets belonging to the surviving spouse, Spouse B, automatically passes into a revocable living trust in Spouse B’s name.

As a result, Spouse B can access assets from the living trust in their name at any time before they die. However, Spouse B does not have access to Spouse A’s irrevocable trust assets. Spouse B would only have access to any income earned from the assets contained in Spouse A’s irrevocable trust. When Spouse B dies, the assets in Spouse A’s name are distributed to Spouse A’s designated beneficiaries, and the assets in Spouse B’s name are distributed to Spouse B’s designated beneficiaries.

Are AB Trusts Irrevocable?

An AB trust remains revocable while both spouses are still alive. Once one spouse passes away, the trust is split into two parts, only one of which becomes irrevocable. The other part goes into a revocable living trust in the name of the surviving spouse, who can receive principal and income from their trust throughout the remainder of their life.

AB Trusts and Estate Tax

When AB trusts were first created, people primarily used them to reduce the estate tax owed by surviving spouses and beneficiaries. When assets pass into irrevocable trusts, they are not subject to estate taxes. However, AB trusts tend to be significantly less effective in this regard today.

As of 2022, married couples enjoy a combined federal estate tax exemption of up to $23.4 million.

Do You Need an AB Trust?

To determine whether an AB trust may be right for you, it can be helpful to examine some of the pros and cons that may affect your current or future circumstances. Some advantages of an AB trust include:

  • Your assets go where you want them to – If you are concerned that your spouse may spend too much money or prevent your assets from going to your preferred beneficiaries after you die, an AB trust may be a useful tool.
  • The surviving spouse avoids taxation – When one spouse dies, their estate tax exemption can be applied so that the assets in the AB trust are transferred to the surviving spouse tax-free.
  • Your beneficiaries avoid taxation – The assets left over in an AB trust after both spouses die can be passed to beneficiaries directly, without the need for them to pay estate taxes.

And here are some possible disadvantages of an AB trust:

  • It might not save you as much money as you’d like – Recent changes in federal estate tax laws have increased exemption thresholds, which means an AB trust will probably not save you too much money unless you and your spouse are very wealthy. However, these rules are set to expire, and exemption thresholds may return to lower levels.
  • The surviving spouse only has limited access to assets – After the first spouse dies, the surviving spouse cannot directly access any assets or principal in the name of the deceased spouse, which could make things difficult for the surviving spouse.
  • Managing the trust can be costly and time-consuming – The surviving spouse will typically need to work with a lawyer or accountant to determine how assets should be divided after their partner’s death. They must also begin keeping records and filing annual income tax returns on behalf of the irrevocable trust.

An experienced estate planning lawyer can discuss AB trusts and whether they might be a good fit for your asset protection goals. We provide a free consultation so you do not have to worry about paying anything simply to understand the options available to you.

Talk To Our AB Trusts Attorneys in Manhattan Today

AB trusts can be helpful estate planning tools for many couples. Contact the Manhattan AB trusts attorneys of Chaves Perlowitz Luftig, LLP for more information about whether an AB trust could work for you in a free initial case review.

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