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

Bob Betsy 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