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What is A-B trust planning?

Some California couples who are planning their estates may have assets above the estate tax threshold. In order to entirely avoid or reduce estate taxes on amounts beyond the level of exclusion, many people choose A-B trust planning, a type of irrevocable trust than can be created either by will or as part of an ongoing living trust that will be implemented upon a person's death.

According to the IRS, the basic exclusion for estates left by people who die will be $5,340,000. For amounts that exceed the exclusion, an A-B trust can provide protection to heirs from estate taxes that would otherwise be imposed.

An A-B trust is comprised of two pieces. The A portion is a marital trust created for the surviving spouse to use for the rest of his or her life. The B portion of the trust is a bypass trust created for use by the decedent's other heirs or descendants. When the surviving spouse dies, the B trust passes tax-free to those beneficiaries. Using trusts in this manner has advantages beyond simply avoiding taxes, however. Trusts also allow the individual to choose the beneficiaries who will eventually receive assets from his or her estate.

Previously, the estate tax exemption could only be used once for a given estate. The law has been changed, and now allows the surviving spouse to utilize the exemption again upon his or her passing, which is known as portability.

A-B estate planning may be an important consideration when an individual's assets exceed the IRS exclusionary threshold. For people who need help with planning their estates and drafting wills, an attorney who practices in wills and estate planning may be able to help choose the best available options to minimize tax liability.

Source: IRS, 'In 2014, Various Tax Benefits Increase Due to Inflation Adjustments", Oct. 31, 2014

Source: American Bar Association, "Glossary of Estate Planning Terms", October 06, 2014

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