In estate planning, there are several different types of trusts. One type is called an ABC Trust. Married couples can make use of an ABC Trust in their estate planning to reduce federal estate taxes. This article will briefly describe what an ABC Trust is and when it’s used.
What is an ABC Trust?
An ABC Trust or Qualified Terminable Interest Property Trust (Q-Tip) is where a couple’s assets are divided into three different parts. It has similarities to an AB Trust. The primary reason for an AB Trust is to minimize the possibility of an estate tax being due upon the death of both spouses.
When one spouse dies, the trust assets are divided. The survivor’s share (usually one-half) is allocated to the surviving spouse’s trust. That’s the Trust A.
The share of the decedent is divided into two parts: Trust B and Trust C.
Trust B – the Exception or By-Pass Trust – receives assets up to the amount of the estate tax exemption. The rest is sent into the Marital Deduction Trust, or Trust C.
When the surviving spouse dies, the assets in Trust A and Trust C will be subject to estate tax along with the rest of the assets that were owned by the surviving spouse before they passed away. Assets that were in Trust B are not subject to estate taxes.
What are the Advantages?
Although it’s more complicated than a simple trust, there are advantages to going this route.
The first advantage is protection from creditors. Each state is different, so you would need to check with a local attorney to understand your state’s protections.
Another advantage is protection in cases where there are future spouses. Let’s say, the surviving spouse remarries and their new spouse passes away. This makes them the surviving spouse a second time. By using an ABC trust, the unused exclusion amount from the first decedent isn’t wasted.
A third advantage is that assets in an ABC Trust avoid probate when the surviving spouse passes away. In general, avoiding probate is desirable because it helps ensure the couple’s wishes are being followed.
Finally, an ABC Trust is a good way to make sure children and grandchildren are allotted the assets in a way the couple originally planned. Without a trust, this may not happen. For example, let’s say a trust wasn’t set up and one spouse dies. The surviving spouse may remarry, and subsequently, their assets may be commingled with their new spouse. Without proper planning, the original couple’s children may be disinherited or would not inherit as much if the couple passes on. Therefore, they would not benefit in the manner the first spouse intended. The ABC Trust prevents this by offering what’s called spendthrift protection. Spendthrift protection used in situations where a person wishes to leave assets to a beneficiary who cannot handle money responsibly.
Who Should Use an ABC Trust?
Generally, an ABC Trust is a great option for any married couple who wants to make sure the wishes of both spouses are carried out. It can help protect the assets you’ve worked so hard to earn.
Every couple’s situation is different so it’s not easy for us to make a blanket recommendation. Give us a call at 714-663-8000 and we’ll help you figure out the best estate plan for your situation.
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