A-B Trust

What is A-B Trust?

An A-B trust is the coming together of two different trusts, which are used as a part of the Estate Plan in order to minimise Taxes. This trust is created by a married couple so that they can gain the benefit of minimising estate taxes. It is formed when each spouse places their asset into the trust and names a person as the beneficiary of their assets. This person can be anyone except their own spouse.

However, an A-B trust divides into two upon the death of the first spouse. This is also where the trust gets its name from. The fact that the trust splits into two upon the first spouse’s death. Trust A (survivor’s trust) and trust B (decedent’s trust).

Example of A-B Trust

When one of the spouses dies, his/her estate is taxed heavily. To overcome this issue, many married couples set up a trust called A-B trust. Under this trust, if a couple has a joint estate property of Rs. 1 crore, the death of a spouse will on trigger any estate tax because of the availability of lifetime exclusion in the A-B trust.

Following the first spouse’s death, the money equal to the tax exemption rate will go into the Bypass trust or B trust. This is also known as the decedent’s trust. The remaining money will be transferred to the survivor’s trust and that spouse will have full control over it.

The surviving spouse has limited control over the decedent’s trust. However, the surviving spouse can access the property and even earn Income.

An A-B trust is not used much nowadays because of the various provisions in estate tax exemptions.