2005 - $1.5 million
2006 - $2 million
2007 - $2 million
2008 - $2 million
2009 - $3.5 million
2010 - repealed
2011 - $5 million
2012 - $5.12 million
2013 - $5.25 million
2014 - $5.34 million
Years ago, when the exemption amount was close to $1-2 million, many families had reason to employ an A-B trust into their estate planning. The primary purpose of an A-B trust is transfer assets to beneficiaries free of the estate tax. Here’s an example of how it works:
A married couple, Harold and Wilma, have an estate worth $8 million. When Harold dies, he leaves everything to Wilma using the unlimited marital deduction which is used only by married couples to transfer any amount of assets free of the estate tax. However, two years later, when Wilma dies and leaves everything to their kids, every dollar in her estate over the $5.34 million exclusion amount will be taxed at 40%.
If this lovely couple had used an A-B trust, upon Harold’s death, their assets would have been split into two trusts, a survivor’s trust (A trust) and a bypass trust (B trust). The bypass trust would have been funded with an amount equal to the exemption amount ($5.34 million) and the survivor’s trust would have been funded with the remaining assets. When Wilma dies, the bypass trust would pass along the $5.34 million to the kids free of estate taxes and the survivor’s trust would pass to the kids, also free of estate taxes. Wilma would have been able to use the money from both trusts during her lifetime so it is not the case that Wilma is giving up the $5.34 million in the bypass trust.
Now however, with such a high estate tax exemption amount, it is fair to ask, why do an A-B trust anymore? Even though most families will not have more than $5.34 million in assets to pass on to their kids, the A-B trust model still has many practical uses.
First of all, there is no way to tell what the estate tax exemption amount will be in a few years or in 10 years. A family’s assets may dramatically shift over time to bring them close to the exemption amount, which may be a lot lower in the future.
Another reason to shelter assets in multiple trusts is to avoid relying on the portability of each spouse’s unused exemption amount. Portability is a new concept in estate planning and tax law, and estate planners are not clear about its permanence or impact down the line.
A-B trusts also have non-tax related purposes. One good example comes up with mixed or blended families. A spouse may want to make sure that their children from a prior marriage are not going to be left out of the estate after he/she dies. With an A-B trust model, the bypass trust can be funded for the eventual distribution of those assets to the children of the prior marriage, without letting the surviving spouse use all of the assets to buy her new husband a Ferrari instead.
There is also the opportunity to shelter assets from creditors using the A-B trust model. If the trusts are drafted appropriately, it can provide for some level of protection from creditors or even give the trustee of the trust the discretion to make the B trust a special needs trust so that the surviving spouse can qualify for public benefits such as nursing home care.
Married couples should always consult a qualified estate planner when making big decisions about their estates. Tax laws change constantly and you’ll want to have someone there to help protect your wishes.
Thanks for reading!