Tax-Saving AB Trusts
Couples can save a bundle on estate taxes with this kind of trust.
First, the good news: Most people don't need to think about federal estate tax, which kicks in only when someone dies owning a very large amount of property. The amount of the estate tax exemption depends on the year of death.
| Year |
Estate tax exemption |
| 2005 |
$1.5 million |
| 2006-08 |
$2 million |
| 2009 |
$3.5 million |
| 2010 |
No estate tax |
| 2011 |
$1 million unless Congress extends repeal |
If you (or you and your spouse) expect that your estate may owe the tax, consider creating a living trust that will both avoid probate and also save on federal estate tax. If you don't, there may be a big estate tax bill when the second spouse dies. That's because the surviving spouse's estate will include his or her share of the couple's property plus the property inherited from the deceased spouse.
An AB trust, also known as a credit shelter trust, lets a couple pass the maximum amount of property to their children or other beneficiaries after both spouses die, while at the same time ensuring the surviving spouse is financially comfortable during his or her lifetime. It's one of the few times in life you really can have it both ways.
Here's how it works: Instead of leaving property outright to the surviving spouse, each spouse leaves most or all of his or her property to an AB trust. When one spouse dies, the surviving spouse can use that property, with certain restrictions, but doesn't own it outright. That's the reason behind the big tax savings: The property isn't subject to estate tax when the second spouse dies, because the second spouse never legally owned it.
When setting up an AB trust, each spouse names final beneficiaries who will receive the trust's property when the surviving spouse dies. Spouses often name the same people -- their children -- as final beneficiaries, but it's not mandatory.
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