Why Have a B Trust & a Decedent's Trust?
- The estate tax is a tax you pay upon the transfer of wealth to your heirs upon your death. Congress originally developed the estate tax so that wealthy families could not pass on huge sums of money from generation to generation without paying tax. The estate tax only applies above certain exemption limits, which is $5 million as of August 2011, so for the vast majority of Americans, the estate tax doesn't apply. Those fortunate enough to have wealth exceeding this threshold limit can take advantage of estate tax exemption laws to create a B Trust and a Decedent's Trust to avoid or minimize estate taxes.
- An A-B Trust is another name for a Decedent's Trust and a B Trust. If you and your spouse establish an A-B Trust, at the time of the first spouse's death an amount equal to the current estate tax exemption limit transfers to the Decedent's Trust, or "A" Trust. The remainder goes into the B Trust for the use of the other spouse. At the time of the second spouse's death, all money is distributed to you and your spouse's heirs.
- The A-B Trust configuration minimizes estate tax by taking advantage of each spouse's estate tax exemption. Without a trust, if you die, your assets will generally transfer to your spouse. After your spouse dies, she can pass your combined assets to your heirs with a $5 million exemption, as of 2011. Any assets above that threshold are subject to the estate tax. However, by virtue of using an A-B Trust, the first $5 million of your assets goes into your A trust, after which it can pass estate-tax free to your heirs. The amount in your spouse's trust, the B Trust, also gets a $5 million exemption from the estate tax. By creating a Decedent's Trust and a B Trust, you effectively get to use $10 million in estate tax exemptions, rather than just $5 million.
- In 2009, only 14,700 Americans had to pay estate taxes, although 33,500 estates did file estate tax returns. However, Congress has the power to lower the estate tax threshold at any time. If you have held a home for a long time, particularly in a desirable area, the value of that home could possibly exceed the estate tax threshold, even if you don't feel "rich" or if you don't have much by way of liquid savings. If you receive an inheritance or win the lottery shortly before you die, your heirs may lose much of that money if you don't protect it in an A-B Trust.