What Married Couples Need to Know About AB Split Trusts
Planning your estate is an essential part of securing your family’s future, and a popular tool to do so is the AB split trust. This article delves into what an AB split trust is and how it could be a viable solution for some married couples. It will help you understand how these trusts work and whether they may suit your estate planning needs.
Understanding the AB Split Trust
In essence, an AB split trust is an estate planning tool used by married couples. It allows a couple to minimize estate taxes and ensure that their assets are distributed according to their wishes upon their passing. An AB trust splits into two upon the death of the first spouse: the A trust and the B trust.
The A trust contains assets for the surviving spouse’s use, maintaining the spouse’s standard of living and providing income. The B trust, meanwhile, holds assets up to the federal estate tax exemption limit and is generally designed to bypass the surviving spouse’s taxable estate.
This structure provides a couple of benefits. First, it can help defer and significantly reduce estate taxes. Second, it helps ensure that the remaining assets will be passed to the couple’s chosen beneficiaries, often their children, upon the surviving spouse’s death.
Applying the AB Split Trust
While AB split trusts have their advantages, they aren’t the best choice for all couples. They tend to be more suitable for those with substantial assets that might be subject to federal estate taxes. As of 2023, federal estate taxes are applied to estates worth more than $12.92 million per individual or $25.84 million per couple. However, these amounts can and do change, so it’s crucial to verify current exemption limits when considering your estate planning strategy.
Moreover, AB split trusts may be less beneficial if the couple’s primary goal is to leave as much as possible directly to the surviving spouse. The B trust assets are not directly accessible by the surviving spouse, although income and, under certain circumstances, principal can be distributed.
Pros and Cons of AB Split Trusts
While AB split trusts can be beneficial in certain situations, they come with both advantages and drawbacks. Here is a look at some of the key pros and cons:
Pros
Minimize estate taxes: One of the biggest advantages of AB split trusts is their ability to reduce estate taxes. By moving a portion of the estate into the B trust, the assets can be excluded from the surviving spouse's taxable estate, which can result in significant tax savings.
Control of asset distribution: AB split trusts allow control over how assets are distributed upon the death of the surviving spouse. This can be especially beneficial in situations involving blended families, where there may be a desire to ensure that certain assets ultimately pass to the children of the first spouse.
Protection from creditors: Assets in the B trust are usually protected from the surviving spouse's creditors, which can be important if the spouse has significant debts or faces a lawsuit.
Cons
Limited access to B trust assets: While the surviving spouse may receive income from the B trust, they may have limited access to the trust's principal. This can be a disadvantage if the surviving spouse needs those assets for unforeseen expenses.
Complexity: AB split trusts are complex legal instruments that can be challenging to establish and manage. They require careful planning, professional assistance, and regular updates to align with changes in tax laws or personal circumstances.
Irrevocability: Once established, AB trusts are typically irrevocable upon the death of the first spouse, meaning the surviving spouse may not have the ability to change the terms of the B trust.
Costs: AB split trusts can be more costly to set up and administer than simpler forms of trusts or wills, due to their complexity.
Updating Your AB Split Trust
An AB split trust isn’t a set-and-forget solution. Estate tax laws change over time, and your personal circumstances and wishes may evolve as well. You will want to review and possibly revise your AB split trust regularly.
Seeking Professional Advice
While this article gives a general overview of AB split trusts, these are complex instruments that require professional advice to be executed properly. They should be tailored to your specific needs, goals, and circumstances.
If you’re considering an AB split trust, consider consulting with a trusted estate planning attorney or a financial advisor who understands your situation and can guide you accordingly.
Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.