Dictionary of Exit Planning Terms

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A/B Trusts

An A/B Trust is used in the United States to maximize the Unified Credit available to a husband and a wife to minimize Federal estate and gift taxes and to accomplish other estate planning objectives. Marital assets are deposited in this type of trust. When the first party to die, this trust then transfers certain assets into an "A" trust and other assets into a "B" trust.

Trust A holds property that remains accessible to the surviving spouse during his or her life. That way the surviving spouse has enough wealth at hand to provide for his or her needs until death.

Trust B receives the other portion of the original trust's property in a manner that minimizes taxation, which necessarily prevents it from being accessible to the surviving spouse during his or her life. This trust is meant to pass on property to heirs, usually the spouse's children, on death of the remaining spouse, but in a way that minimizes the estate tax and gift tax that would have been applied to the property if it had passed through a will, or if given as a gift during life (gift inter vivos). This Trust B takes advantage of such features as Step-Up in Basis (where the value of the property transferred to the successors of the Trust is said to be the fair market value at the time of the transfer at death, and not what the Parents originally paid for it. This means less capital gains tax will have to be paid by the children when they sell the property).

The B or "bypass trust" receives property as specified in the trust document - the bypass trust may receive all of the property of the decedent spouse, or half of the spouses' co-owned property, or it may receive enough property to make full use of the decedent's estate tax exclusion.

The bypass trust is typically created to achieve one or more of the following goals:

  • To maximize the use of the decedent's estate tax exclusion amount, in order to minimize estate tax upon the death of the surviving spouse
  • To ensure that the decedent's spouse's property will be disposed of in accordance with the decedent's wishes, even if the surviving spouse remarries or chooses to adopt a different estate plan for the surviving spouse's assets.