What is a B Trust?

Jim B.

A B trust is the wife's half of the AB trust, a type of living trust designed for married couples. Also known as the marital bypass trust, an AB trust is designed to help the beneficiaries of wealthy married couples escape estate taxes. Whereas in a normal situation the wealth of one spouse is passed to the other at the time of the first spouse's death, an AB trust calls for the wealth of the deceased spouse to be delivered into an irrevocable trust. This trust is accessible to the surviving spouse and, if handled correctly, can greatly lessen or even eliminate the estate taxes for the couple's descendants when both are deceased.

An AB trust is when a spouse dies, she passes her B trust on to her beneficiaries, which can be the same people marked for the A trust.
An AB trust is when a spouse dies, she passes her B trust on to her beneficiaries, which can be the same people marked for the A trust.

Estate tax laws are always changing and therefore the benefits of an AB trust are somewhat at the mercy of lawmakers. Assuming the standard situation of estate taxes and one-time tax exemptions for wealth to be passed at the time of someone's death exists, this trust can be very beneficial. In short, it divides the wealth of a couple into an A trust for the husband and a B trust for the wife.

The AB trust is designed for married couples.
The AB trust is designed for married couples.

For example, a married couple has $3,000,000 US Dollars (USD) in their estate. If there is no inheritance plan in place and the husband dies, his half of the estate goes to the wife. With a marital bypass trust in place, the husband's wealth would go into an A trust. The wife would have access to this trust for necessary expanses. When she dies, her wealth would go into the B trust, and both trusts would pass on the children, descendants, or whoever was chosen by the couple to be the inheritors of their wealth.

If, in the above example, there was a federal estate tax exemption of $2,000,000 USD in place, both the A trust and the B trust would pass on to the children below the limit, allowing them to inherit the estate free from taxes. This is much more beneficial to the inheritors then if the estate had been passed down in its entirety from the surviving spouse. In that scenario, one third of the couple's estate would be subject to steep estate taxes.

The tax benefits of an AB trust are clear, but there are some flexibility issues that might make it disadvantageous in some cases. For example, the surviving spouse has access to the trust of the deceased but cannot sell the assets therein. If the estate includes property, the surviving spouse also may be prevented from moving to a new home. Any overuse of the trust's assets by the surviving spouse could lead to scrutiny from tax officials.

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