AB Trusts(Bypass Trust or Credit Shelter

Trust)Jason Coles

Karen Merrill

Arnie Wolff

Why have a Credit Shelter Trust?

• The whole idea is how to avoid paying death taxes

• Essentially you can transfer an additional $500,000 tax-free to your beneficiaries by paying $2000 if attorney fees

• For Married Couples

Will vs. Trust

• Both are assets designed to transfer assets to beneficiaries upon death

• Historically, trusts were the domain of the very wealthy– Traced back to Roman times where money

went automatically to oldest son

Will

• A will is an instrument that is looked at upon your death, it divides your estate– All property is yours until you die– Pertains to one person– Revocable before death

Trust

• A trust has ownership of the property before your death– A trust is like a corporation, acting on your

specific instructions– Can pertain to more than one person– Irrevocable once set up– You transfer assets to the trust to avoid taxes

Unified tax credit

• Estate tax - when a wealthy person dies, up to 50% of their estate can be subject to estate or death tax

• Unified tax credit - The government allows the first $1 million to be transferred to beneficiaries tax-free (actual credit is variable depending on year of death)

• Thereafter, the estate is taxed according to death tax tables (high tax rate)

• Each person is entitled to a unified tax credit, not everyone uses them

BobBetsy

Bill

Introducing the Black Family

Married couple with inadequate planning

• Bob married to Betsy with a $2 million estate (1 son Bill)– Bob dies, leaves entire estate to Betsy under the

unlimited marital deduction (which provides no death tax on monies given to spouse)

– Betsy lives on $2 million estate– Betsy dies, leaving son Bill $1.5 million

• $1 million transferred tax-free under unified tax credit, other million at 50% death tax rate

– Bob’s unified tax credit went to waste!

Enter the AB trust

• Take advantage of Bob’s unified tax credit!• Bob and Betsy create a living trust with AB provision with

all their assets (e.g. home, real estate, cars, etc.)• The living trust has specific instructions regarding Bob’s

death• Pursuant to the living trust provisions

– Upon Bob’s death, 2 trusts are created– Trust B is created containing assets in the amount of the unified

tax credit in the year of Bob’s death ($1 million in our example)– All remaining assets are transferred to Trust A (controlled by

Betsy)

AB Trust cont.

• Upon Betsy’s death, $1 million of Trust A is transferred tax-free (Betsy’s unified tax credit) to Bill, any remaining is taxed at death tax rates

• Trust B is transferred tax-free (Bob’s unified tax credit) to Bill

• AB trust allows Bob’s unified tax credit to be preserved, Bill is $500 grand richer

Uncertainty

• In 2001, Bush attempted to repeal the death tax – he wasn’t successful in making it permanent– The unified tax credit increases from $675k in 2002 to

$3.5 million in 2009– Estate tax doesn’t exist in 2010– In 2011 the $1 million exemption is reinstated

• The value of the trust is somewhat uncertain (i.e. dying in 2010, it’s worthless)

• But the sum of the protection is that trust B can be funded at the appropriate tax credit amount

• Caveat: if the death tax is ever permanently repealed, there is no value to an AB trust