AB TrustIf you’re married and would like to get the most out of your joint federal estate tax exemptions, one effective option is an AB trust. There is a common misconception that these types of trusts only benefit people who have large, valuable estates, but in actuality anyone who could owe estate tax may benefit from these types of trusts.

The primary benefit of an AB trust is that it helps avoid the estate being taxed before assets and property are passed on to beneficiaries. Each spouse places his or her property into an irrevocable trust. When the first spouse passes away, the beneficiaries of the trust receive that individual’s property to use it for the benefit of the surviving spouse.

The surviving spouse, meanwhile, does not own that property, but can use it and even spend principal in some cases. Once he or she dies, all of the property and rights related to the trust pass down in full to the surviving beneficiaries. Because the trust assets are technically owned by the trust and not the spouse, they are not subject to estate taxes.

Disadvantages associated with AB trusts

Clearly, the creation of an AB trust has some benefits, especially if you believe estate taxes could be a challenge. However, there are a few issues you will want to consider before deciding to go with an AB trust.

First and foremost, AB trusts are irrevocable. If a spouse dies, there can no longer be any changes to the trust. It has become a legally binding agreement. This could potentially cause difficulties for the surviving spouse and/or the trust beneficiaries, and could even create friction between the various parties involved.

Settling and distributing assets from an AB trust can also be an expensive and challenging process. You will definitely need the assistance of a skilled estate planning attorney, as there is a great deal of paperwork and bookkeeping involved. You may also need to work with an accountant to determine how to best distribute assets between the deceased spouse’s irrevocable trust and the surviving spouse’s living trust.

Every time you decide to distribute property from a trust, there are going to be tax issues you have to address. Having skilled legal and financial professionals working with you ensures you fully understand the implications of these tax issues.

To that end, while AB trusts are not necessarily right for everyone, they do pose some significant advantages in the right situations. If you are looking for more guidance on whether an AB trust is right for you and your spouse, speak with an experienced estate planning attorney.


Steve Hardy is Chair of BoltNag’s Corporate, Tax and Estate Planning Practice Group, BoltNagi is a widely respected and established estate planning law firm serving clients throughout the U.S. Virgin Islands.