In the realm of estate planning, AB Trusts have long been a popular tool for married couples seeking to minimize estate taxes. However, recent changes in tax laws have significantly altered their relevance and effectiveness, leaving many couples wondering if AB Trusts still hold value in their estate plans.

Understanding AB Trusts: Traditional Estate Tax Mitigation Method

The primary purpose of an AB Trust is to reduce estate taxes for married couples. Upon the death of one spouse, the couple’s assets are divided into two separate trusts: Trust A and Trust B. Trust A, often referred to as the survivor’s trust, holds the assets of the surviving spouse, while Trust B, commonly known as the bypass trust or the deceased spouse’s trust, holds the assets of the deceased spouse. Trust A can typically be revoked and modified during the lifetime of the surviving spouse, whereas Trust B is irrevocable. The surviving spouse usually receives income from the assets in Trust B and, in certain circumstances, may access the principal of Trust B for support and care.

The key benefit of this structure is its ability to effectively double the estate tax exemption for married couples. Under federal estate tax law, each individual is entitled to a lifetime exemption, meaning married couples can double the exemption by utilizing AB Trusts.

Evolving Tax Landscape: Impact on AB Trusts

The American Taxpayer Relief Act (ATRA) of 2012 made significant changes to the estate tax provisions in tax law. Firstly, ATRA made the “portability” of the deceased spouse’s unused estate tax exemption permanent if timely elected after the death of the first spouse. Essentially, this allows the surviving spouse to use the unused portion of the deceased spouse’s exemption for estate and gift tax purposes.

Several years later, at the end of 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which made significant changes to federal estate and income tax laws. Notably, TCJA essentially doubled the lifetime estate tax exemption to $13.61 million by 2024, currently set at $12.92 million per individual and $25.84 million per married couple. Therefore, by 2024, married couples can transfer up to $27.22 million of assets estate tax-free to their heirs either during their lifetime or at death.

The substantial increase in the exemption threshold has diminished the efficiency of AB Trusts, thus reducing their appeal to many married couples, as the primary reason for establishing AB Trusts was often to save on estate taxes.

AB Trusts: Still Applicable in Certain Scenarios

Despite the recent changes in tax law that have dampened the appeal of AB Trusts, they remain a valuable estate planning tool for some couples. For those with assets exceeding the lifetime estate tax exemption, AB Trusts can still offer significant tax advantages. Additionally, couples seeking to shield their assets from creditors may find AB Trusts to be an effective solution.

Specific circumstances may also warrant the use of AB Trusts. For example, if one spouse has significant assets acquired before marriage or from a previous marriage or relationship, AB Trusts can ensure that these assets pass to children from the prior marriage rather than to a surviving spouse’s new spouse.

Adapting to the New Tax Reality: Reassessing and Modifying AB Trusts

Given the ever-changing tax environment, it is crucial for married couples to review their existing AB Trusts with experienced estate planning attorneys. This assessment will determine whether the trusts still align with their current needs or if modifications are necessary.

If AB Trusts remain viable, attorneys can assist in adjustments to minimize their tax impact. For instance, modifying trust provisions may allow the surviving spouse greater access to the trust assets during their lifetime.

Conclusion: AB Trusts in an Evolving Estate Planning Landscape

While AB Trusts have historically been a favored estate planning tool for married couples, recent changes in tax laws have diminished their overall appeal. However, AB Trusts still hold significant value in specific circumstances and may provide tax advantages and asset protection for certain couples.

If you have an existing AB Trust, it is imperative to consult with an estate planning attorney to assess its ongoing relevance and make necessary modifications. By proactively evaluating your AB Trust and considering the evolving tax landscape, you can ensure that your estate plan remains aligned with your current financial situation and long-term goals.