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Integrated Wealth Management

Is AB Trust Planning Still Relevant?

For years, married couples have used AB trusts to maximize the amount of assets they pass to their heirs free of estate tax. See this AB trust diagram for a refresher on how AB trusts work. When the estate tax exemption amount was only $2,000,000 per person several years ago, an AB trust arrangement was necessary just to pass $4,000,000 to heirs fee of estate tax. With the estate tax exemption amount now over $5,000,000 per person and with surviving spouses allowed to use the “unused” portion of the tax exemption from the deceased spouse, is there any reason to use AB trusts if the value of your estate is below $5,000,000?

Reasons to Continue Using AB Trusts Even if Your Estate is below $5,000,000

  • Avoid future estate tax: Growth in B trust assets is not subject to estate tax at the second death; although it is subject to capital gain tax.
  • Protect against creditors: B trust assets are protected from future creditors.
  • Long-term care protection: B trust assets are not considered available resources for purposes of determining Medicaid eligibility. Although B trust assets could still be subject to a lawsuit to provide for the needs of the surviving spouse.
  • Retain control over assets: B trusts protect the decedent’s heirs in the event the surviving spouse gets remarried.
  • Transfer assets to grandchildren: Couples who want to take advantage of passing on assets to their grandchildren still need AB trusts in order to use their generation-skipping exemptions.
  • Planning for state estate tax: Currently there is no estate tax in California but there are 22 states that have some form of estate or inheritance tax (See this  table from The Kitces Report). If you plan to move to a state that has estate or inheritance tax, a B trust could still be a relevant tool.

Reasons to Discontinue Using AB Trusts

  • None of the benefits listed above appeal to you or pertain to you.
  • More legal and accounting cost: AB trust estate planning is more expensive and there are ongoing tax preparation fees for B trusts.
  • More administrative work: The Trustee is responsible for the annual accounting of the B trust and the issuance of K-1s to the beneficiaries.
  • Higher Potential Capital Gains Taxes at the Second Death: B trust assets do not receive a second step-up in basis at the death of the surviving spouse.
  • Higher taxes: Income from B trusts is taxed at the top tax rates (including the new 3.8% Medicare surtax) once the income exceeds $11,950.

What Should You Do?

 All you can do is weigh the pros and cons of using AB trust planning and make the best choice for your personal circumstances. Along with your estate planner, we can help you think through your situation and decide on the best course of action. B trusts are still a very valuable planning tool but they certainly are not for everybody -- especially now that the exemption credit per person is over $5,000,000.