There are two basic types of trust documents designed specifically for married couples. One is called the A-B Trust and the other is a Disclaimer Trust. Both are revocable trusts until the death of the first spouse and both form two sub-trusts upon the death of the first spouse. While both spouses are living, the trust remains revocable which means the assets are taxed on the spouses’ Social Security numbers and they are free to amend or revoke anytime they agree to do so. Both spouses can serve as trustees while they are alive and competent. When the first spouse dies, the trust goes into transition and depending on whether it is an A-B trust or a disclaimer trust, that transition looks differently.
What is the Difference Between A-B Trusts and Disclaimer Trusts?
The difference lies in how the assets of the married couple is disposed of after the passing of the first spouse. With a disclaimer trust, the surviving spouse can elect the amount of joint assets to “disclaim” and place into an irrevocable trust. Disclaimer trusts provide much more flexibility and control to the surviving spouse.
The A-B trust is funded with joint assets such as properties, investments and financial accounts. The “A” refers to the first spouse that passes and the “B” refers to the surviving spouse. When the first spouse dies, half of the assets are transferred to an irrevocable trust until the second spouse dies. The surviving spouse then uses the other half of the assets for living expenses. This half remains in a revocable trust and is continued to be taxed under that spouse’s Social Security number. When the second spouse dies, all assets are combined to comprise the estate and distributed to beneficiaries according to terms established under the A-B trust.
The purpose behind these trusts is to minimize estate taxes. When A-B trusts were very popular in the 1990’s, it was due to the fact that the estate tax exemption was very low and estate tax rate was very high. In recent years, the federal estate tax exemption has been raised to $12.06 million per individual so these types of trusts were not needed as much except for the high-net-worth families. With the federal estate tax exemption changes in the pipeline for 2025, more couples are inquiring about these asset protection strategies.
The trust splits assets into two sub-trusts once the first spouse dies, so this lowers the amount of the taxable estate. This division of assets serves as the main estate planning goal because each sub-trust contains only a fraction of the couple’s assets, making it less likely to invoke estate tax liability. The disclaimer trust does not require the surviving spouse to split the estate when the first spouse passes away. The surviving spouse has a 9-month period to choose to divide any portion of the estate off into an irrevocable trust if it would be beneficial. This flexibility appeals to many clients. Since the federal tax exemption is ever-changing, assets fluctuate in value, and living expenses change and evolve, this flexibility can provide a huge benefit to the surviving spouse and later to his or her beneficiaries.
For more information on married couples’ estate planning strategies like A-B trusts and disclaimer trusts, contact the experienced attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
