The terms of an A & B trust provide that after the death of the person who created the trust the assets will be split between two sub-trusts, the A Trust and the B Trust. The A Trust benefits the surviving spouse. The B Trust supposedly benefits the children. A formula is set forth in the trust to determine how the assets are split.
The reason for this device is to minimize estate taxes by placing the amount
upon which there is no tax in the B or children’s trust. This trust is structured so that when the surviving spouse subsequently dies the children’s trust is not in his or her taxable estate. Everything else goes to the A Trust which is structured so as to qualify for the marital deduction. The A Trust will be in the surviving spouse’s estate when he or she dies later.
By using this type of trust parents can pass double the tax free amount to their children. If the first to die merely left everything to the surviving spouse then only one tax free amount would pass to the children on the death of the surviving spouse.
Everything else would be subject to tax.
Naturally this type of device is useful only for taxable estates. And it
works only if the assets are split between both spouses so that the first to die has the tax free amount to pass to the children’s trust.
The surviving spouse can be the income beneficiary of the children’s
trust.
The A Trust is often called a marital trust and the B Trust is often called
a family trust.
When the surviving spouse’s rights to the A Trust are limited to income and the executor of the estate is given an option to elect how much of the trust will be used for the marital deduction, it is called a Q-Tip Trust.
For more information, contact the Law Offices of Donald Thompson.