You’ve worked hard for your money, so it’s likely you want to leave as many assets as you can to your heirs. If you’re a a married couple, an AB trust can help you save on Massachusetts estate taxes.
An AB trust is a trust created by married couples to help minimize estate taxes for the surviving spouse after one spouse passes away. It’s also called a credit shelter trust and a bypass trust. This joint trust allows the estate to be split into two parts (or trusts) after the death of the first spouse, and then be taxed accordingly.
First, some facts:
- A trust is a legal document that can take legal title to your assets, like investments, bank accounts, real estate, vehicles, and valuable personal property.
- The Massachusetts estate tax generally works like this: if your estate is valued at $1M or less, there is no estate tax when you die; if it’s one dollar over $1M, however, you’re taxed on the ENTIRE amount—not just the amount that’s over.
How can an AB trust help a married couple save on Massachusetts estate taxes? When the first spouse dies, the trust splits into two separate trusts: let’s say trust A is the surviving spouse’s trust and B is the family trust.
Family trust (B):
The family trust (B) is irrevocable and will pass to beneficiaries—usually their children. The family trust can’t pass to the surviving spouse; however, that spouse can live on the income from that trust during their lifetime.
Surviving spouse trust (A):
The surviving spouse has control over this trust and can use it however they want. When the surviving spouse passes away, both trust A and B pass to the couple’s named beneficiaries.
Here’s an example of how an AB trust helps a Massachusetts couple save $78,000 on estate tax.
Example Without Tax Planning
Mike and Sharon have been married for 21 years. They have combined assets worth $1.2 million—each one owning $600k in assets. Mike dies first, leaving his assets directly to his wife, Sharon. Typically, assets left to a surviving spouse aren’t subject to estate tax due to marital exemption rules. Now Sharon owns all the couple’s assets and only has her own $1 million exemption. When she dies, her $1.2 million estate would owe estate taxes (estimated at 6.5%) of $78,000.
Example With Tax Planning
Let’s say Mike and Sharon decided to use an AB trust which includes estate tax provisions. When Mike dies, his $600k goes into trust B and no tax would be due on that money, and $600k goes to Sharon’s trust A. For the rest of her life, Sharon would receive any income from the trust property in trust B and have the ability to access the principal as needed, though she wouldn’t technically own the trust. She would also be able to do whatever she wants with the assets in trust A. When Sharon dies, her estate would have only her $600k (trust A), and no estate tax would be due since the amount is under the $1M mark.
This plan saves the estate $78,000 in estate taxes, allowing Mike and Sharon to leave that savings to their heirs.
If you’re a married couple sand want to save on Massachusetts estate taxes, so you can keep as much of your life’s savings in your family as possible, contact us today. Our experienced Massachusetts estate planning attorney will meet with you for a free confidential, no-cost consultation to discuss how we can help you maximize your legal strategies to protect your assets.