In addition to the unlimited marital deduction, the federal government gives everyone a “unified credit.” The credit exempts the first $2 million (for 2006 through 2008) of your estate from federal estate taxes. As part of the Tax Relief Act of 2001, the exempted amount will steadily increase until it reaches $3.5 million by 2009. After the repeal of the estate tax in 2010, the credit will go back down to $1 million.

Unfortunately, those who have an estate valued over the exemption amount and who rely completely on the unlimited marital deduction may not benefit from their unified credit as much. Using the marital deduction at the first death merely postpones estate taxes to the death of the surviving spouse. Then, when the surviving spouse passes away, the estate tax burden may be unnecessarily large.

There are strategies you can use that may save you a substantial amount in estate taxes. One of the most widely used strategies is known as the A-B trust. This strategy can enable you and your spouse to pass on up to $4 million (for 2006 through 2008) in assets — exempt from estate taxes.

The A-B Trust

By using an A-B trust, you will ensure that both spouses take advantage of the unified credit — once at the death of the first spouse, and then again at the death of the second spouse.

An A-B trust can be set up by establishing a living trust with an A-B provision. Upon the death of the first spouse, two separate trusts are created. The assets of the surviving spouse are transferred to the A trust, and an amount up to the exemption amount of the deceased spouse’s assets is transferred to the B trust. This then creates two taxable trusts, each of which is entitled to use an exemption.

The B trust is subject to estate taxes. However, because of the unified credit, no taxes will be owed. The surviving spouse maintains control over the assets of the A trust and receives income from the B trust. Then, at the death of the second spouse, only the A trust is subject to estate taxes because the B trust was taxed at the first death. After the death of the surviving spouse, the B trust can continue for the benefit of the grantors’ family, often the children. The trust assets can be divided into separate equal trusts for the benefit of the grantors’ children, who will receive net income, and at some specified age, they will receive the principal.

There are many considerations involved with A-B trusts, and you’ll need the help of competent legal counsel. However, the A-B trust can be an effective way to reduce estate taxes, if they apply, and preserve family assets.

AXA Advisors, LLC does not provide legal or tax advice.

This material was written and prepared by Emerald Publications.
© 2006 Emerald Publications

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, numerous changes to the federal estate and gift taxes are scheduled to take effect between 2002 and 2010. These include repeal of the estate tax for the year 2010 although gift taxes on lifetime transfers would continue in effect. Current (meaning year 2001) estate and gift tax law would be reinstated for year 2011 and thereafter. Therefore, the Act provides several years of lower taxes and higher exemptions followed by one year of repeal for 2010. You should consult your tax advisor regarding the possible application of this recent legistlation to your situation before implementing any estate and gift tax planning techniques.

EC21890 (11/01)