Berman & Asbel, LLP

Avoiding federal estate tax with an AB trust

Married couples in Pennsylvania may be able to pass on more of their assets to their children and grandchildren if they use an AB trust. An AB trust is specifically designed for married couples who want to maximize their estate tax exemptions. With a well-planned AB trust, a married couple that would otherwise owe federal estate taxes may be able to pass a tax-free inheritance to their beneficiaries.

When a husband and wife set up an AB trust, they both fund a single trust that will be split into two trusts after one spouse dies. The two trusts, called Trust A and Trust B, are treated differently. Trust A is considered to belong to the deceased spouse and is irrevocable. Trust B is considered to belong the surviving spouse, who maintains control over its assets.

Though the surviving spouse has little control over Trust A, its assets are still to be used for the benefit of the surviving spouse for as long as he or she lives. The surviving spouse will be able to receive any income that the trust generates and use the assets for things like housing, health care and education. When the surviving spouse dies, both Trust A and Trust B are transferred to the beneficiaries without incurring estate taxes.

An AB trust may benefit a married couple whose combined assets are greater than the federal estate tax exemption. If a married couple will already be exempt from federal estate taxes, they may want to consider the benefits of other types of trusts. An estate planning attorney may be able to help a married couple determine what type of trust would benefit their estate the most.

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