An ABC Trust, also known as an “A-B-C Trust” or “Marital and Family Trust,” is a type of estate planning tool commonly used by married couples to minimize estate taxes and provide for their beneficiaries. It consists of three separate trusts: the A Trust (also known as the “Survivor’s Trust”), the B Trust (also known as the “Bypass Trust” or “Credit Shelter Trust”), and the C Trust (also known as the “Marital Trust” or “QTIP Trust”).
Here’s how it typically works:
- Upon the death of the first spouse, their assets are divided into two parts: the A Trust and the B Trust. The A Trust holds assets that are eligible for the estate tax marital deduction, meaning they can pass to the surviving spouse tax-free. The B Trust holds assets up to the estate tax exemption amount, effectively “bypassing” the surviving spouse’s estate and avoiding estate taxes upon their death.
- The surviving spouse has access to the assets in both the A Trust and the B Trust for their benefit during their lifetime, but they do not own the assets outright.
- Upon the death of the surviving spouse, the assets in the A Trust and the B Trust are distributed to the designated beneficiaries, such as children or other heirs.
The C Trust, if utilized, is often used to hold assets in a manner that qualifies for the marital deduction while allowing for more control over the ultimate disposition of those assets, particularly if there are children from a previous marriage.
Overall, an ABC Trust can be a valuable estate planning tool for married couples seeking to minimize estate taxes, protect assets, and provide for their loved ones according to their wishes.