A/B Trust Explanation
REASONS TO CONTINUE USING AB TRUSTS
Following are the primary arguments for and against the use of an AB Trust outside the estate tax aspect of the trust:
- Avoid future estate tax: Growth in B trust (decease spouse) assets is not subject to estate tax at the second death; although it is subject to capital gain tax.
- Protect against creditors: B trust assets are protected from future creditors.
- Long-term care protection: B trust assets are not considered available resources for purposes of determining Medicaid eligibility. Although B trust assets could still be subject to a lawsuit to provide for the needs of the surviving spouse.
- Retain control over assets: B trusts protect the decedent’s heirs in the event the surviving spouse gets remarried.
- Transfer assets to grandchildren: Couples who want to take advantage of passing on assets to their grandchildren still need AB trusts in order to use their generation-skipping exemptions.
- Planning for state estate tax: Currently there is no estate tax in Wyoming, but there are 22 states that have some form of estate or inheritance tax. If you plan to move to a state that has estate or inheritance tax, a B trust could still be a relevant tool.
Learn more here about trusts in Wyoming .
- None of the benefits listed above appeal to you or pertain to you.
- More legal and accounting cost: AB trust estate planning is more expensive and there are ongoing tax preparation fees for B trusts.
- More administrative work: The Trustee is responsible for the annual accounting of the B trust and the issuance of K-1s to the beneficiaries.
- Higher Potential Capital Gains Taxes at the Second Death: B trust assets do not receive a second step-up in basis at the death of the surviving spouse.
- Higher taxes: Income from B trusts is taxed at the top tax rates (including the new 3.8% Medicare surtax) once the income exceeds $12,300.
Upon the first spouse’s death, the assets in the trust divide into two separate trusts, namely: the “Survivor’s Trust” and the “Bypass Trust.” The Bypass Trust will generally hold the deceased spouse’s assets which equal the available exclusion amount; and the Survivor’s Trust will hold the balance of the deceased spouse’s assets, if any (together with all the surviving spouse’s interest in the trust’s assets).
The estate receives a marital deduction for the deceased spouse’s assets which are allocated the Survivor’s Trust. The assets allocated to the Bypass Trust are included in the deceased spouse’s taxable estate; however, since the amount of assets allocated to the Bypass Trust does not exceed the federal estate tax exclusion amount, the deceased spouse’s estate does not have any federal estate tax liability.
The surviving spouse has the right to receive all the income from the Survivor’s Trust during his or her lifetime; and he or she may withdraw such amounts of the principal of the Survivor’s Trust at any time as he or she wishes.
The Bypass Trust generally provides that the surviving spouse will receive so much of the net income and principal thereof as the Trustee deems necessary or advisable for his/her proper health, maintenance and support.
Because the Bypass Trust becomes irrevocable upon the first spouse’s death and the surviving spouse’s rights to the assets in the Bypass Trust are limited to the rights granted to the surviving spouse by the trust agreement, the assets of the Bypass Trust (regardless of their value in the future) are not included in the taxable estate of the surviving spouse upon the surviving spouse’s death; but rather these assets are held, along with any assets remaining in the Survivor’s Trust, for the benefit of the couple’s children (and/or other beneficiaries).