A/B/C Trust

Last Updated :

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Blog Author :

Aswathi Jayachandran

Edited by :

Raisa Ali

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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What Is An A/B/C Trust?

An A/B/C Trust, often called an "A-B-C or ABC Trust," is a kind of estate planning strategy created for married couples to reduce estate taxes and offer flexibility in asset distribution. It is also known as a "Marital Bypass Trust".

What Is An A-B-C Trust

Estate planning requires managing the orderly transfer of assets and money to recipients. The trust is set up to distribute assets among Trust A, the Survivor's Trust; Trust B, the Bypass Investment; and Trust C, the Qualified Terminable Interest Property (QTIP) Trust, following the first spouse's passing. Each trust has a distinct goal and advantages.

Table of Contents
  • A/B/C Trusts are an estate planning tool that aims to minimize estate taxes while providing for a surviving spouse and future generations.
  • The structure involves the division of assets into three separate trusts: A Trust (Marital Trust), B Trust (Bypass Trust or Credit Shelter Trust), and C Trust (Family Trust or Residuary Trust).
  • The A Trust provides for the surviving spouse, the B Trust maximizes the deceased spouse's estate tax exemption, and the C Trust benefits future generations.
  • Cons include administrative complexity, the need for ongoing management, additional costs, and professional assistance.

A/B/C Trust Explained

An A/B/C Trust is a specialized estate planning approach tailored to reduce estate taxes while providing for the surviving spouse and future generations. It is particularly advantageous for married couples with substantial assets or complex family dynamics.

This trust divides the assets of the first spouse into three distinct shares: "Trust A" (Survivor's Trust), "Trust B" (Bypass Investment), and "Trust C" (Qualified Terminable Interest Property Trust), following the initial spouse's passing. Each trust serves a specific purpose and offers unique advantages.

In an A/B/C Trust, the surviving spouse is the primary beneficiary. Trust A, the Survivor's Trust provides financial support to the surviving spouse and allows them to make modifications. In contrast, Trust B, the Bypass Investment, cannot be modified by the surviving spouse. The "C Trust" includes assets "Q-tipped" to be included in the surviving spouse's taxable estate.

Upon the surviving spouse's passing, the remaining trust assets are typically distributed to secondary beneficiaries, often the grantor's children or other chosen heirs. One key advantage of an A/B/C Trust is its potential to reduce estate taxes by segregating assets into different trusts and utilizing both spouses' estate tax exemptions.

Assets such as cash, securities, real estate, or properties can be utilized to fund an A/B/C Trust. Assets held within the trust are protected from creditors, legal claims, and unintended beneficiaries, such as future spouses or children from previous marriages. The grantor maintains control over trust assets and decision-making, optimizing tax savings, supporting the surviving spouse, and ensuring appropriate asset distribution.

Examples

Let's look into a few examples:

Example #1

Let us understand the concept through a hypothetical example:

Let's say a couple named Dan and Nina has a $10 million estate. They can maximize their estate tax exemptions and safeguard their fortune for future generations by using an A/B/C trust and hence decide on it. They divide the amount into three parts. The A and B Trusts receive Dan's $5 million portion of the estate upon his demise. While the $3 million A Trust meets Nina's requirements, the $2 million B Trust meets their children's needs, designed to bypass Nina's estate. The C Trust holds the remaining $5 million and is exempt from estate taxes until Nina passes away.

Example #2

Let's take another hypothetical example of a couple, David and Rose. Here, the spouse remarries in the future.

So, David and Rose have an $8 million estate and decide to set up an A/B/C trust to protect their assets and reduce estate taxes. Upon passing, David's $4 million portion is split between the A and B Trusts. While Rose's needs are taken care of by the $2 million A Trust, their children benefit from the $2 million B Trust, which avoids Rose's estate. The C Trust, which provides greater flexibility for future generations, comprises the remaining $4 million. However, in the twist of events, Rose gets married to Steve after receiving money from B Trust and has two children from that marriage. Despite being Rose's kids, these children will not receive the remaining $4 million from the C trust as they are not designated heirs.

Pros And Cons

Various pros and cons of A/B/C Trusts are as follows:

Pros

  • Estate Tax Minimization: A/B/C Trusts efficiently utilize both spouses' estate tax exclusions to reduce prospective tax obligations following their demise.
  • Asset Protection: The A/B/C trust structure shields assets from estate taxes for several generations by putting them in separate trusts, preserving wealth.
  • Control: A/B/C Trusts provide control and flexibility in the distribution and management of assets for the deceased's spouse.
  • Protection and Financial Support for Surviving Spouse: The ABC Trust structure offers financial support to the surviving spouse, ensuring their well-being and preserving assets for the grantor's designated heirs. It also provides potential creditor protection against potential creditors or legal claims, which is especially beneficial for spouses with financial vulnerabilities or risk of future legal claims.

Cons

  • Administrative Difficulty: Creating and maintaining A/B/C Trusts can be challenging and may need constant attention. Hence, working with a knowledgeable estate planning lawyer is important.
  • Costs: Creating and maintaining an ABC Trust might be more expensive than other estate planning strategies. These expenses comprise the trust's drafting-related legal costs, ongoing trustee charges, and tax and accounting expenditures associated with trust administration.

 A/B/C Trust vs A/B Trust

The differences between the two are as follows:

Key PointsA/B/C TrustA/B Trust
ConceptA/B/C Trust involves three separate trusts: A, B, and C.A/B Trust consists of two trusts: A (Survivor's Trust) and B (Bypass Trust).
ProcessThe A Trust provides income and potential distributions to the surviving spouse, the B Trust shields assets from estate taxes for beneficiaries other than the surviving spouse, and the C Trust benefits future generations.The A Trust holds assets eligible for the marital deduction and provides income and possible principal distributions to the surviving spouse, while the B Trust shelters assets from estate taxes for beneficiaries other than the surviving spouse.
Purpose A/B/C Trusts aim to reduce inheritance taxes, support the surviving spouse, and protect assets for future generations.A/B Trusts are typically created to preserve assets for beneficiaries, maximize estate tax exemptions, and provide for the surviving spouse.

Frequently Asked Questions (FAQs)

1. What is the difference between an ABC Trust and an Exemption Trust?

Both trusts share a similar structure for asset division but differ in their primary objectives. An Exemption Trust focuses solely on leveraging the estate tax exemption of the deceased spouse. In contrast, the ABC Trust aims to reduce estate taxes, support a surviving spouse, and safeguard assets for future generations.

2. How does ABC Trust planning address the State Death Tax Gap?

ABC Trust planning can help bridge the state death tax gap by increasing estate tax exemptions. However, it's important to note that while the B Trust (bypass trust) may avoid federal inheritance tax, some states impose a separate state estate tax in addition to federal taxes.

3. Is the ABC Trust revocable?

In an ABC Trust, the "A Trust" is revocable and can be modified by the surviving spouse. Conversely, the "B Trust" is irrevocable and unmodifiable. Similarly, the "C Trust" is also irrevocable.