An A-B trust is a revocable living trust which divides into two trusts upon the death of the first spouse. This type of trust makes use of both the estate tax exemption ($3.5 million per person in 2009) and the marital deduction to make it so that no estate taxes are due upon the death of the first spouse. The B Trust is also known as the Bypass trust and it contains the amount of that years applicable exclusion amount. The A trust is the marital deduction trust which will typically contain both the surviving spouse's separate property and one half community property interests but also the residue of the deceased spouse's estate after the estate tax exemption has been utilized by the B trust. The use of an A-B trust ensures that both spouse's applicable exclusion amounts are effectively used, thereby doubling the amount of property which can pass to heirs free of Federal Estate Taxes.
The Alabama Marital Deduction Trust, also referred to as Trust A, and the Bypass Trust B are estate planning tools commonly used in Alabama to minimize estate taxes and provide financial security for surviving spouses. Here is a detailed description of these trusts, along with their different types and key features: 1. Alabama Marital Deduction Trust (Trust A): — The Alabama Marital Deduction Trust (Trust A) is a type of trust created by one spouse for the benefit of the surviving spouse. — Its main purpose is to take full advantage of the marital deduction, which allows the transfer of unlimited assets to the surviving spouse free of federal estate taxes. — Trust A is revocable and can be amended or terminated by the granter during their lifetime. Any income generated by the trust assets is taxable to the surviving spouse. — It typically includes provisions that allow the surviving spouse to receive income generated by the trust assets and possibly even principal distributions if necessary for their general welfare. — Trust A is beneficial in situations where the combined value of the couple's assets exceeds the federal estate tax exemption limit. Types of Alabama Marital Deduction Trust — Trust A: a) Qualified Terminable Interest Property (TIP) Trust: This type of Trust A ensures that the granter's wishes regarding the ultimate distribution of the trust assets are fulfilled. It grants the surviving spouse income for life, but does not give them control over the ultimate disposition of the assets. The granter can designate the remainder beneficiaries, often children from previous marriages or other loved ones. b) Lifetime Beneficiary Trust: Trust A can also be structured as a lifetime beneficiary trust, wherein the surviving spouse becomes the lifetime beneficiary with the ability to enjoy income and possibly principal distributions while leaving the remainder to other specified beneficiaries or charities. 2. Bypass Trust B: — The Bypass Trust B, also known as the Credit Shelter Trust or the Family Trust, is created in conjunction with Trust A. — Its main objective is to ensure that the granter's federal estate tax exemption is fully utilized in the event of the granter's death. — Bypass Trust B is an irrevocable trust that becomes funded upon the granter's death with assets up to his or her available federal estate tax exemption. — The surviving spouse does not have complete control over the assets held in Trust B but can still benefit from the income generated by the trust. — The trust assets held in Bypass Trust B are not included in the surviving spouse's estate, thus effectively minimizing federal estate taxes upon the spouse's eventual passing. Types of Alabama Bypass Trust B: a) Marital Qualified Terminable Interest Property (MQT IP) Trust: This type of Bypass Trust B is designed to take advantage of the marital deduction while still preserving the estate tax exemption amount. The surviving spouse receives income for life, and the remainder beneficiaries are typically the children from the marriage. b) Disclaimer Trust: Trust B can also be structured as a disclaimer trust, where the surviving spouse has the option to disclaim certain assets or portions of the assets into the trust, relying on the bypass trust provisions to minimize estate taxes. In conclusion, the Alabama Marital Deduction Trust (Trust A) and Bypass Trust B are two key components of an estate plan, used to maximize the marital deduction, minimize estate taxes, and ensure the financial well-being of the surviving spouse. The variations of these trusts, such as TIP Trust, Lifetime Beneficiary Trust, MQT IP Trust, and Disclaimer Trust, add flexibility and customization to accommodate individual preferences and family dynamics.
