Navigate Estate Taxes with AB Trust Strategies

Avoiding Estate Taxes With Strategic AB Trust Planning

At Goldberg & Goldberg, we understand the complexities wealthy married couples face when navigating federal gift and estate taxes. Fortunately, there’s an advantageous tax provision known as “portability.” This allows couples to collectively transfer assets up to a significant value without incurring federal gift or estate taxes. While portability has reduced the necessity for AB trusts, or bypass trusts, these can still be a vital tool for estate tax mitigation in certain situations.

The AB Trust Explained

Prior tax regulations provided each spouse with a separate estate tax exemption; however, the transfer of assets to the surviving spouse—an action typically untaxed due to the marital exemption—left the possibility of estate tax if the survivor’s estate exceeded individual exemption thresholds.

Back in 2009, the exemption was valued at $3.5 million. Take the case of Christine and Terry, who had a $4 million estate. On Christine’s passing in 2009, her $2 million share transferred to Terry tax-free via the marital exemption. However, when Terry later passed within the same year, his $4 million estate faced a 45% tax on the value over the $3.5 million exemption.

Using an AB trust, the initial $2 million from Christine could have been directed into an irrevocable trust. No estate tax would be assessed at that time since her estate wasn’t over the federal exemption limit. Terry, as the surviving spouse, would enjoy the use of the trust’s assets. Upon his death, only his $2 million would have been considered for estate taxes, likely resulting in zero taxes owed.

Modern Portability Rules

The portability rule allows surviving spouses to apply any unused exemption from their deceased spouse to their own. As a result, most couples won’t require an AB trust to manage their estate tax considerations. However, proactive filing of an estate tax return at the first spouse’s death is necessary to leverage this exemption.

When AB Trusts Are the Right Choice

Goldberg & Goldberg recognizes that despite the significant federal exemptions and the advent of portability, AB trusts are still beneficial for:

  • Unmarried couples.
  • Ensuring inheritance flows to your children, particularly important in blended family situations.
  • Residents in states with separate estate taxes, which may lack exemption portability and potentially trigger state estate taxes.

Partnering with a seasoned estate planning attorney is crucial when considering AB trusts. Benefits are sizable, but it’s important to weigh potential drawbacks such as:

  • Limited survivor access to trust assets.
  • Legal and accounting costs upon a spouse’s death.
  • Additional trust income tax filings and recordkeeping requirements.
  • Legislative uncertainty that may prompt future trust alterations.

Should you be considering the implementation of an AB trust or any other estate planning vehicles, do not hesitate to reach out to Goldberg & Goldberg. Our skill is your peace of mind.

Contact us today for a Free Consultation: (301) 654-5757 and let us guide you through the intricacies of estate tax planning with tailored solutions.

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