Orsbon & Fenninger, LLP

Estate Planning and Estate Administration

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Using an AB trust to reduce estate tax

Married couples in North Carolina might want to know about the possible tax benefits they could be eligible for, and an AB trust is one tool that a couple may wish to utilize. Whether one has a large or small estate, anyone who has property subject to an estate tax may need an AB trust.

When a person passes away, this benefactor can pass assets to others through a will. When transferring property this way, the estate is taxed and goes through probate. AB trusts allow spouses to leave their estate to the trust instead of a partner. When both people pass away, the assets in the trust go to the couple's beneficiaries. An AB trust can stipulate that an estate should be used for the benefit of the surviving spouse, which lets this spouse use the property.

The property in an AB trust is not subject to estate tax because the surviving spouse does not own the property. The property belongs to the trust and then to the beneficiaries. This reduces taxable expenses by half. When one spouse dies, an AB trust is divided into two trusts. Trust A is irrevocable as it contains the decedent's share of the trust while the surviving spouse still has access to his or her share in trust B. When both people die, beneficiaries receive trust A tax-free. Depending on the amount, trust B could also be tax-free due to exemptions.

There are multiple types of trusts, and an AB trust is only one type of fund that could be used when leaving an estate behind. One may wish to speak to an estate planning attorney. When deciding whether a trust is necessary, one might look at the kind of assets he or she possesses as some may not be subject to the probate process.

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