Not taking into account tax issues in estate planning can leave beneficiaries of trust or spouses in financial difficulty or even bankruptcy. If a couple has children, and does not take advantage of the AB Trust, the children could end up penniless after paying off debts and taxes. An AB Trust uses the personal estate tax exemption of each spouse to maximize tax savings on the combined estate for the heirs of the couple (in most cases their children). The construction utilizes an ordinary shared living trust for both spouses and two additional trusts for each spouse, Trust A and Trust B. If one of the spouses dies, all his/her designated property of the shared trust goes into a new Trust A, which becomes irrevocable and gives the surviving spouse a lifelong interest in the trust assets. No trust assets are transferred upon the death of the first spouse to the other spouse. They remain in the irrevocable Trust A. The designated property of the surviving spouse goes into Trust B, which stays revocable. The children of the couple are usually nominated as second beneficiaries of the two trusts. The children receive the trust assets of Trust A and Trust B (as long as the surviving spouse has not changed Trust B) according to trust terms. In terms of estate tax, the first transfer from the shared trust to Trust A is taxable because the marital deduction does not apply. However, there is the personal threshold that reduces or nullifies estate taxes. When the children become beneficiaries of Trust A, there is no more estate tax to pay. Estate tax is then applied on the assets of Trust B (the trust of the surviving spouse). However, the personal estate tax threshold of the second spouse reduces or nullifies the estate tax of this transaction. The personal tax exemption amount of both spouses can be combined for passing property to the children. In contrast, if the ownership of the first spouse's property was transferred to the surviving spouse first and then transferred to the children upon the second spouse's death, the tax exemption amount could only be used once. For example, if the tax exemption threshold is $3.5 million (like in 2009), this construction allows a couple to pass up to $7 million in property free of estate tax. The tax savings effect has to be considered as soon as a couple owns property that is worth more than the tax exemption threshold (e.g. $3.5 million in 2009). However, it is not always easy to determine the exact value of property. When drafting a tax saving living trust construction, accounting skills are required to do a proper evaluation of estate assets. Rinne Legal helps people with bankruptcies, estate planning, and loan modifications in Contra Costa County, Sacramento County and Solano County. Rinne Legal has offices in Walnut Creek, Fairfield, Sacramento and Elk Grove. Contact Rinne Legal for a free consultation. These blog posts are for informational purposes only and not intended nor should be construed as legal advice. These blog posts may be considered attorney advertising in some states. Prior results described on blog posts do not guarantee similar outcomes in future cases. There is no intent to create an attorney-client privilege or relationship with anyone accessing information on this blog. Authors posting on this blog are not obligated to reply to any emails seeking legal advice. The information contained on this blog is not intended to be a solicitation.
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