In the world of estate planning, making sure that your loved ones are well taken care of is a top priority as a revocable living trust lawyer knows well. One of the most effective strategies to achieve this goal is through A/B Trust planning. In 2024, this approach is more important than ever due to current tax laws and future changes that could impact your estate. Let’s explore what A/B Trusts are, how they work, and why they are so vital this year.
What Is A/B Trust Planning?
As our friends at Stuart Green Law, PLLC can explain, A/B Trust planning is a strategy used by married couples to minimize estate taxes and ensure that assets are passed on to their heirs efficiently. When one spouse passes away, the estate is divided into two separate trusts: Trust A (the survivor’s trust) and Trust B (the bypass trust).
Trust A is managed by the surviving spouse and includes their share of the estate. They have full control over the assets in this trust and can use them as they wish.
Trust B holds the deceased spouse’s share of the estate. This trust is irrevocable, meaning it cannot be changed or revoked. The surviving spouse can benefit from the income generated by Trust B’s assets, but they do not have full control over these assets. Upon the death of the surviving spouse, the assets in Trust B are transferred to the beneficiaries, typically the children.
The Importance Of A/B Trusts In 2024
In 2024, the federal estate tax exemption amount is $13.61 million per individual. This means that an individual can leave up to $13.61 million to their heirs without incurring federal estate taxes. For married couples, this exemption doubles to $27.22 million. However, it’s crucial to note that these amounts are set to change.
The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily increased the estate tax exemption amounts, but this provision is set to sunset, or expire, in 2026. When this happens, the exemption amounts will likely revert to pre-2018 levels, which were significantly lower. This potential reduction makes estate planning strategies like A/B Trusts incredibly important for those who want to protect their assets from high estate taxes in the future.
How A/B Trusts Help With Tax Planning
A/B Trusts are designed to take full advantage of the estate tax exemption for both spouses. Here’s how it works:
1. Maximizing Exemptions: When the first spouse passes away, the assets placed in Trust B use up their estate tax exemption. These assets are not included in the surviving spouse’s estate, which means they won’t be taxed again when the second spouse dies. This effectively allows the couple to maximize their combined estate tax exemptions.
2. Asset Protection: Trust B provides a layer of protection for the assets it holds. Since these assets are in an irrevocable trust, they are protected from creditors and cannot be mismanaged by the surviving spouse. This ensures that the assets will be available for the beneficiaries as intended.
3. Flexibility For The Surviving Spouse: While Trust B is irrevocable, the surviving spouse can still benefit from the income generated by the trust. They can use this income to maintain their lifestyle without having full control over the principal assets, providing a balance between flexibility and security.
Why Act Now?
Given the current estate tax exemption of $13.61 million and the impending changes in 2026, 2024 is an ideal time to implement A/B Trust planning. By acting now, you can take advantage of the higher exemption amounts and ensure that your estate is structured in a way that minimizes future tax liabilities.
It’s important to work with an experienced estate planning attorney who understands the intricacies of A/B Trusts and can tailor a plan to fit your unique situation. This proactive approach can save your family significant amounts of money and provide peace of mind knowing that your assets are protected and will be distributed according to your wishes.
A/B Trust planning is a powerful tool for married couples looking to protect their assets and minimize estate taxes. With the current estate tax exemption amount of $13.61 million and the potential changes coming in 2026, 2024 is a critical year to consider this strategy. By understanding and utilizing A/B Trusts, you can ensure that your loved ones are taken care of and your estate is managed efficiently. Now is the time to act and secure your financial legacy for the future. Contact a lawyer near you to get started.