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What is an a Trust?

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  • Written By: Charity Delich
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 November 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
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An A trust is part of an AB trust or a marital residuary trust, a mechanism used primarily in the United States for estate planning. In general, these trusts work by ensuring that a surviving spouse is able to access the deceased spouse’s assets for the rest of the surviving spouse’s life. Typically, the surviving spouse avoids paying any estate taxes on the trust assets. After the surviving spouse dies, the trust assets are passed on to the named beneficiaries in line with estate tax rules.

In general, an AB trust splits into two trusts when the first spouse dies: an A trust and a B trust. The A trust, which is also called a marital trust, QTIP trust, or marital deduction trust, owns all of the assets that are not covered by estate tax exemptions. On the other hand, the B trust, also called a bypass trust, credit shelter trust or family trust, owns any assets that are exempt from estate taxes.

Typically, A trust assets are taxed after the surviving spouse dies. These assets are then passed on to the final beneficiaries. B trust assets usually pass to the final beneficiaries on a tax-free basis once the surviving spouse dies.

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For example, suppose that a married couple has created an AB trust for assets worth $4,000,000 US Dollars (USD) and that the federal tax exemption is set at $3,500,000 USD. When the first spouse dies, the AB trust will split into the A and B trusts. The B trust will contain $3,500,000 USD, which will pass on to any beneficiaries free of tax after the surviving spouse dies. The A trust will contain the remaining $500,000 USD. Once the surviving spouse dies, this amount is subject to estate taxes.

Generally, assets held in A trusts can only be used for the benefit of surviving spouses. Additionally, income generated from an A trust must be paid to the surviving spouse. The surviving spouse often uses only A trust assets because these assets will be taxed when inherited by the final beneficiaries. Since the B trust is not subject to estate taxes, it is usually best for the beneficiaries if the surviving spouse avoids touching any assets in the B trust. The final beneficiaries of an A trust may be different from those in a B trust.

In order to create an AB trust, a married couple must consult with an attorney who has expertise in estate planning. Structuring the trust correctly is a complex procedure, requiring specialized knowledge of estate laws. Trusts that are not accurately constructed may be thrown out in probate court.

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