AB Trusts: The ABCs of the marital tax exemption

Posted by Gregory Singleton | Nov 30, 2020 | 0 Comments

AB Trusts are a tool for sheltering assets from taxes. There is both a Federal and Minnesota estate tax. The Federal estate tax exemption is $11.58 million per person in 2020. This means that for large estates, any amount over $11.58 million is taxed at the Federal rate of 40 percent. For Minnesota, the estate tax exemption is $3 million, with a graduated tax for amounts greater. The AB Trust is an instrument for married couples to get the most bang for their buck out of the estate tax exemption.

The AB Trust is a multi-step process, so bear with me.

  1. Set up the Trust. The AB trust language is included in the married couple's will or revocable living trust.

  2. Divide Assets. The married couple divides their assets into roughly equal portions for each. Note that this means joint accounts will often need to be separated.

  3. B Trust. When the first spouse dies, their portion of the assets – up to the amount of the federal or state tax exemption – funds what is called a “B Trust” or “Bypass Trust.” Note that the amount of the federal exemption is doubled for the married couple. (Not for Minnesota – there is no portability.) So, in 2020, the exemption $23.16 million on the Federal level.

  4. A Trust. At the same time, the surviving spouse places their assets into an “A Trust”. The A Trust is also known as a “Marital Trust”. Any assets of the deceased spouse that exceeded the tax exemption goes into the A Trust as well.

  5. Income from A Trust. For the rest of their life, the surviving spouse gets to live off of the income of the A Trust. The B Trust accumulates income and grows in size during this time.

  6. Beneficiaries. When the surviving spouse dies, the assets of the B Trust pass to the beneficiaries of that trust tax free. The assets of the A Trust also pass to the beneficiaries of the A Trust. Note that the estate taxes for the assets in the A Trust have been deferred until this time.

In sum, the blueprint of an AB trust is as follows:

AB Trust

A couple things of note: First, the A Trust and B Trust can have different beneficiaries. Second, the SECURE Act does not affect the AB Trust scheme, except when the second spouse dies. Then the trusts are limited in how long they can “stretch”. Third, if the deceased spouse's estate in the B Trust does not use up the entirety of the estate tax exemption it can be transferred to the surviving spouse. Fourth, the surviving spouse's death will not trigger a basis adjustment for assets in the bypass trust.

Back in 2001, both the Minnesota and Federal exemptions were merely $675,000. The AB trusts were much more popular back when the estate tax exemptions were lower. But while the Minnesota estate tax exemption is only $3 million, AB trusts remain to have some life.

 

About the Author

Gregory Singleton

Trusted Legal Advisor Gregory Singleton is a skilled attorney, experienced in both litigation and transactional work. He has tried multi-million-dollar cases and has negotiated multi-billion dollar contracts. With Signature Law, his goal is to make the law accessible to you, your families, and y...

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