A Guide to Tax Saving AB & Marital Bypass Trusts

How Can an AB/Marital Bypass Trust Save Money on Federal Estate Tax?

Mar 5, 2010
Carol Finch

How Can an AB Trust Help Bypass Estate Taxes? - svilen001

Those with larger assets may be liable for estate taxes when they die. For some an AB or marital bypass trust can be a good way of avoiding tax liability and probate.

Although estate taxes have been suspended for 2010 they are likely to return. If the repeal is not extended into 2011 those with estates valued at over $1 million may be liable for taxation. One of the more common ways around this is to take out an AB or marital bypass trust. This can remove tax liability and avoid the probate process in general. How do AB/marital trusts work and are they a good idea?

What are AB/Marital Bypass Trusts?

These living trusts are often set up by those with larger estates that may be charged federal estate taxes on the death of the asset holder(s). They basically allow an estate to bypass the taxation and probate processes by removing ownership of assets from individuals and putting them into a trust.

So, for example, a married couple can set up an AB/marital bypass trust to protect their assets. This involves putting their individual shares of the joint estate into a trust for their beneficiaries rather than leaving it to each other. Because the individuals technically no longer own these assets when a partner dies, they may be able to skip liability for estate taxes.

How Does a Marital Bypass Trust Affect the Surviving Partner?

While both partners are alive the trust simply holds their estate but once one party dies there are conditions set on how the trust's assets can be used. If these conditions are not met then the estate may once more become the legal property of the individual and any tax breaks may be lost.

If the trust is set up to include the home then the surviving partner can continue to live there and they can use any income earned from the trust. They can also access it to pay for certain living and health care needs but have to do so under the terms of the trust and IRS regulations.

Is an AB Trust a Good Idea?

Those that may see their estate reduced significantly by taxes may find this a good solution. It is generally recommended for people aged over 60 and may not suit those that are younger or that have complicated familial/marital responsibilities.

Bear in mind also that the surviving spouse from a marriage may also not be able to use all of their assets freely and will have to take both administrative and fiscal responsibility for managing the trust. In some cases it may be better to look at other kinds of living trusts. A marital bypass option can then be taken up later in life if it is deemed necessary.

Those that are interested in setting up an AB/marital bypass trust as part of their estate planning process may want to take specialist advice. Each individual couple will have particular needs and circumstances and using an experienced estate management specialist may be a useful way of assessing the pros and cons of this, and other, asset management solutions.