The Heritage Law Center, LLC Blog

What is an AB Trust?

POSTED ON: December 31, 2018

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. An AB trust, also called a credit shelter trust, is designed to minimize estate taxes for married couples by splitting into two trusts upon the first spouse’s death.

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.

Here’s an example where an AB trust helps a Massachusetts couple save $78,000 on estate tax.

Example without tax planning
Mike and his wife, Sharon, have combined assets worth $1.2 million—each one owning $600k in assets. When Mike dies, he leaves his assets directly to his wife, Sharon. Typically, bequests to a surviving spouse aren’t subject to estate tax due to marital exemption rules. But 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
What if Mike and Sharon used an AB trust which includes estate tax provisions? When Mike dies, his $600k goes into the family trust, funding pot A. No tax would be due on that money. For the rest of her life, Sharon would receive any income from the trust property and have the ability to access the principal as needed, though she wouldn’t technically own the trust. When Sharon dies, her estate would have only her $600k, and no tax would be due.

Planning for estate taxes using a family trust saved them $78,000 that will get passed on to your heirs.

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