LaTonya and her husband Jean Paul have been married 8 years and have 2 children together. LaTonya also has a child from a previous relationship Tracy. If LaTonya died today her gross estate would have a fair market value of $6800000. She has made no lifetime transfers. Reply to a classmates description of the ABC Trust Arrangement explaining how such an arrangement could provide for Jean Paul and the 2 children as well as for Tracy while fully utilizing the marital deduction estate tax credits and other planning tools.
REPLY TO THE THREAD BELOW 200 WORDS
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Dear LaTonya
Married couples have the ability to maximize their exemption from estate taxes by using an AB Trust and this can be setup as part of the couples will. The A Trust referred to as a Marital QTIP or a Marital Deduction Trust. The B Trust referred to as a Bypass or Credit Shelter Trust (What Married Couples Should Know About the AB Trust 2017). The A and B component of the trust is a joint trust split into two and consists of the Decedents Trust and the Survivors Trust. The Decedents Trust is funded up to the maximum amount which is currently $5.25M and can pass tax free in the year of death and the balance into the Survivors Trust (FAQs – Living Trusts On The Web 2017). The Decedents Trust is considered irrevocable and held for the lifetime of the surviving spouse as the sole trustee. It is important to note that the Survivors Trust is protected from creditors and the beneficiaries of the trust cannot be anyone else but the Decedents children (FAQs – Living Trusts On The Web 2017). The balance of funds in the Survivors Trust qualifies for the unlimited marital deduction and there is no tax due. Upon the death of the survivor the trust is subject to the tax on the amount that exceeds the exemption amount in the year of death. One of the perks here is that because the trust is irrevocable and the Decedents Trust was already subject to tax the estate is not subject to estate taxes (FAQs – Living Trusts On The Web 2017). As a result of TRA 2010 and ATRA 2012 a new trust was introduced called the Marital Deduction Trust also known as the QTIP (Qualified Terminable Interest Property Trust). This qualifies the Survivors Trust for the unlimited marital deduction and as a result there is no tax due at the first death. When the surviving spouse passes the Decedents Trust is treated as part of the survivors taxable estate and the remaining assets receives a new basis adjustment also known as a step-up. This provides the beneficiaries of the estate to sell without any capital gains tax implications (FAQs – Living Trusts On The Web 2017).
I hope this information was beneficial for you.
Blessings
Irena
References
FAQs – Living Trusts On The Web. (2017). Livingtrustsontheweb.com. Retrieved 3 March 2017 from http://livingtrustsontheweb.com/pages/faq.html
What Married Couples Should Know About the AB Trust. (2017). The Balance. Retrieved 3 March 2017 from https://www.thebalance.com/what-is-an-ab-trust-3505380