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.
Iowa Marital Deduction Trust — Trust A and Bypass Trust B The Iowa Marital Deduction Trust is a financial planning tool used by married couples in Iowa to minimize estate taxes upon the death of the first spouse. It involves creating two trusts: Trust A (also known as the Marital Trust) and Trust B (also known as the Bypass Trust or Credit Shelter Trust). Let's take a closer look at each trust and their significance in estate planning. Trust A — Marital Trust: Trust A, the Marital Trust, is designed to provide for the surviving spouse during their lifetime. This trust ensures that upon the first spouse's death, a portion of their estate is transferred to Trust A, allowing the surviving spouse to have access to the income generated by the assets held within the trust. It's important to note that the surviving spouse does not own the trust assets outright but can use them for financial support. The key feature of Trust A lies in the marital deduction, which allows for an unlimited transfer of assets between spouses without triggering any estate taxes. This means that the assets transferred to Trust A are not subject to federal estate taxes upon the death of the first spouse. Instead, they are eligible for taxation when the surviving spouse passes away. Bypass Trust B — Credit Shelter Trust: Bypass Trust B, also referred to as the Credit Shelter Trust, aims to preserve the federal estate tax exemption of the deceased spouse. When the first spouse passes away, a portion of their estate equal to the maximum estate tax exemption is transferred to Trust B. This transfer ensures that the exemption amount remains utilized, ultimately reducing the estate tax liability upon the surviving spouse's death. The assets placed in Trust B are held for the benefit of the surviving spouse and other beneficiaries, such as children or other relatives. The surviving spouse can receive income generated from the trust, and in some cases, the trust principal, subject to specific provisions outlined in the trust document. Different types of the Iowa Marital Deduction Trust: While Trust A and Trust B form the foundation of the Iowa Marital Deduction Trust, variations may exist depending on individual circumstances and estate planning strategies. Some variations include: 1. TIP Trust (Qualified Terminable Interest Property Trust): This type of Trust A ensures that the surviving spouse has control over how the trust assets are distributed upon their death, allowing them to direct the disposition among their beneficiaries. 2. Power of Appointment Trust: This type of Trust B provides the surviving spouse with the power to distribute trust assets to a specific class of beneficiaries, typically descendants or other close family members, during their lifetime. 3. Irrevocable Life Insurance Trust (IIT): This type of trust is often used in conjunction with the Iowa Marital Deduction Trust and allows the purchase of life insurance policies to provide liquidity to pay estate taxes while keeping the policy proceeds outside the taxable estate. In conclusion, the Iowa Marital Deduction Trust — Trust A and Bypass Trust — - provides married couples with an effective way to minimize estate taxes upon the death of the first spouse. Each trust serves its unique purpose, with Trust A providing support for the surviving spouse and Trust B preserving the federal estate tax exemption. Different variations of these trusts ensure flexibility to tailor the estate plan to meet specific needs and goals. Consulting with an experienced estate planning attorney is recommended to navigate the complexities of establishing these trusts in accordance with Iowa state laws and individual circumstances.
