An AB trust is a revocable estate planning tool which allows a married couple to pass the maximum amount of property to their beneficiaries (normally their children) after they die, while at the same time ensuring that the surviving spouse benefits financially from the estate during the remainder of his or her life. AB trust provisions are often combined with a living trust, so that the one document can allow the estate to both avoid probate and greatly eliminate estate taxes.

With an AB trust, each spouse will generally place all, or a majority of, his or her property into the trust. Any property can be placed into the trust -- property owned separately, as well as half or any portion of shared property. Remaining property can be disposed of at the owner's discretion. Each spouse also names the other as the life beneficiary of his or her trust, and designates final beneficiaries (typically the children). The trust document states that when the first spouse dies, the AB trust must be split into two separate trusts: Trust A will contain the deceased spouse's property, and Trust B will hold the property of the surviving spouse.

The Trust A of only one spouse (the first to die) can ever become operation because, obviously, the surviving spouse's life beneficiary has already passed away. The surviving spouse continues to have a revocable living trust, Trust B, which is under his or her complete control. The trust can be amended or its assets used, added to, or removed as the survivor sees fit.

The surviving spouse has a 'life interest' in the property of Trust A (that of the first spouse). Any restrictions can be placed on the surviving spouse's rights and use of the Trust A assets, but both spouses commonly give the other the maximum allowable rights, which include the right to receive all income from the trust and the right to spend trust principal for the surviving spouse's health, support, and maintenance of accustomed lifestyle. In addition to being the life beneficiary, the survivor is usually also named as the trustee, giving him or her control of the trust assets and spending for any permissible use.

When the surviving spouse dies, the final beneficiaries receive the property of both Trusts A and B. Although these beneficiaries are usually one and the same (the couple's children), they aren't mandated to be so. The surviving spouse, therefore, has no power to decide who receives the Trust A property upon the survivor's death. That decision was made when the original trust document was drafted by the spouse who was the first to die.

Because Trust A property never legally belongs to the surviving spouse, it is subject to tax only once, when the first spouse dies. If the assets in Trust A appreciate in value before the second spouse dies, the increase isn't subject to estate tax. This is a major advantage of AB trusts. However, they don't necessarily work well for everyone.

For instance, once the first spouse dies, that spouse's Trust A becomes irrevocable, placing limits and burdens on the surviving spouse which can't be changed. This may make the AB trust unsuitable for younger couples. If one spouse were to die prematurely, the surviving spouse could have to live under the Trust A restrictions for decades. In a case such as this, he or she might be better served by simply inheriting the first spouse's property outright. This is, of course, possible under the IRS' marriage deduction.

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