9. What is an AB living trust and how does it work?
With an AB living trust (sometimes called an "exemption" or "bypass" trust), the property contributed to the trust by the first grantor to die will be distributed to his or her beneficiaries when the surviving grantor dies. The surviving grantor cannot change the beneficiaries of the deceased grantor's trust property.
Imagine that a husband and wife create a typical joint trust and the husband passes away. Under the LegalZoom Joint Living Trust (and many other joint trusts), some or all of the husband's share can be held in trust for the wife during her lifetime. During her lifetime, she can change who will receive that trust property after her death. This may be exactly what the husband wanted. On the other hand, the husband's wishes may have been, "I want my wife to be able to use my share as long as she lives. But after she dies, I want to make sure that whatever is left goes to my beneficiaries instead of to people she chooses after I'm gone." If you want to make sure that each person's property goes to his or her separate beneficiaries, an AB trust may be a better choice than a joint trust or a simple will, regardless of the size of your estate.
Some married couples prefer an AB living trust over a traditional joint trust because of its flexibility and the tax benefits it offers. For many years, the AB living trust has allowed couples to avoid certain estate taxes. However, with the recent revisions to the federal estate tax law, only a very small percentage of people will owe estate tax on death. Under current law, $5 million of a person's estate is exempt from federal estate tax, and married couples can exempt $10 million from federal estate tax without establishing an AB trust.
Nonetheless, the AB living trust is still a powerful estate-planning tool. Many states impose estate taxes on estates valued at significantly less than the federal estate tax exemption amount. Moreover, the flexibility provided by a revocable AB living trust ensures that the trust can be amended to reflect life changes while both grantors are alive. Also, under an AB trust, your surviving spouse has access to your property after you die, but the property remaining after your spouse's death will be distributed to the beneficiaries you select.
Administrative Requirements of an AB Living Trust
After the death of the first spouse or grantor, the trustee of an AB Trust must comply with certain administrative requirements, including keeping separate books and records for Trust A and Trust B to prove that trust assets are being used properly. The trustee of Trust B (usually the surviving grantor) must file annual income tax returns for Trust B, although the trust will not owe income tax because its net income is distributed to the surviving grantor.