What Is an AB Living Trust?
An AB living trust is a common tool used by estate planning attorneys to maximize the estate tax savings of a married couple. Understanding how an AB living trust functions is vital in order for the estate plan to be carried out successfully.
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Divison of Assets
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An AB living trust requires assets to be divided between two sub-trusts upon the death of the trust's creator. The first sub-trust is commonly known as the "A trust" or "survivor's trust", is revocable and the assets held in this sub-trust are freely accessible by a surviving spouse. The second sub-trust is commonly known as the "B trust" or "exemption trust" and is irrevocable, meaning access to the assets of the exemption trust are limited to particular circumstances explained in the trust document.
Estate Tax Savings
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An AB living trust maximizes the possible estate tax savings by utilizing the deceased individual's estate tax exemption amount. The exemption must be used within nine months of the date of death or it is lost forever. The exemption sub-trust portion of the AB living trust holds assets up to the amount of the deceased individual's estate tax exemption amount and is not subject to further estate taxes in the future as long as the assets remain in the exemption sub-trust.
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Access to Assets
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A surviving spouse has free access to the survivor's sub-trust, but may be required to have certain needs before funds may be withdrawn from the exemption sub-trust. This restriction preserves the ability to shield the assets held in the exemption sub-trust from future estate taxes upon the death of the surviving spouse.
Taxes
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Any income generated by the survivor's sub-trust is reported on a surviving spouse's personal IRS Form 1040. Income generated by the exemption sub-trust is reported on its own separate tax return, IRS Form 1041.
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References
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