Tag Archives: Estate Taxes

Marital A/B trust: Avoid the married couple estate tax trap

If you do not plan carefully, you may fall into the married couple estate tax trap.  A marital a/b trust could be the solution.

What is the married couple estate tax trap?
Why should married couples consider a marital a/b trust?

The married couple estate tax trap

Q. If you are married, are estate taxes due when the first spouse dies?
A. The first spouse to die may give all of his/her assets to the surviving spouse without paying any estate tax, even if the value of their property exceeds the estate tax exemption, so long as the surviving spouse is a U.S. citizen.  This is referred to as the unlimited marital deduction.

An estate tax calculation will be done when the surviving spouse dies, and will be based upon the fair market value of all the assets owned by the surviving spouse, including those inherited from the first spouse.

Q. What happens to the $2 million estate tax personal exemption of the first spouse to die?
A. If the first spouse to die leaves everything directly to the surviving spouse, the first spouse to die loses his or her right to claim the existing $2 million personal tax exemption allowance.  We refer to this as the married couple estate tax trap.

When the second spouse dies, all the property the survivor owns (which includes the inherited property) is subject to an estate tax.  The surviving spouse can only claim one personal federal estate tax exemption.

There is a way to get the benefit of two estate tax exemptions and still take care of the second spouse to die. Instead of leaving everything outright to each other, couples should leave assets in what is known as an A/B trust.


Why should a married couple consider an a/b trust?

Q. What is an A/B trust?
A. Married couples can leave instructions in their will or in their living trust to establish new A/B trusts when the first spouse dies. In an A/B Trust, the marital assets are split and transferred to two separate trusts, known as trust “A” and trust “B,” created when the first spouse dies.

Q. What happens with trust “A”?
A. Trust “A,” which was set up by the surviving spouse, is a revocable trust.  The surviving spouse can be trustee and usually has total control over the assets in the trust.  The surviving spouse can generally do with the assets transferred to trust “A” whatever he or she pleases.

The surviving spouse decides who inherits the assets in trust “A” when he or she dies, and may change the names of the beneficiaries until he or she dies or becomes incapacitated.

Q. What happens with trust “B”?
A. Trust “B” is set up according to the instructions previously specified in the living trust of the deceased spouse. The new trust “B becomes an irrevocable trust upon the death of the first spouse.
The assets in trust “B” are managed according to the instructions specified in the decedent’s living trust agreement.  The trustee of trust “B” is the person the deceased specified in their living trust and commonly is the surviving spouse.

Usually, the income from trust B is used to support the surviving spouse and the principal is maintained for the benefit of the ultimate beneficiaries of the trust after the surviving spouse dies.  Since the trust “B” is irrevocable, the surviving spouse cannot generally change any terms or instructions defined by the first spouse to die.

Q. How does an A/B trust save on estate taxes?
A. The will or the living trust of the first spouse to die instructs the estate representative to transfer to Trust “B” property up to the maximum federal estate tax exemption allowable in the year of death.

When the surviving spouse dies, the property in Trust “B” is not part of his or her estate, regardless of its value. The deceased spouse’s estate only owes estate taxes on Trust “A” assets.

Setting up an A/B trust provides two tax advantages for married couples.  First, it allows each of them to claim the estate tax exemption.  Secondly, and just as important, it allows the assets in Trust “B” to grow and be distributed tax-free when the second spouse dies.

Q. What happens if the value of the assets of the first spouse to die exceeds the estate tax personal exemption allowance?
A. If the value of the property of the first spouse to die exceeds the federal estate tax personal exemption allowance, the first spouse to die has several choices.

Choice 1. If you want to control the distribution of the excess assets when the surviving spouse dies, your trust instructions can provide that the amount of your estate in excess of the estate tax personal exemption allowance should be placed in a new trust, commonly referred to as a “C” trust.

The trustee of the “C” trust must manage these assets according to your directions, which can be the same as directions you leave for the “B” trust. For instance, your instructions can direct any income be paid to a surviving spouse and upon his or her death, the “C” trust assets be given to your grandchildren.

Your estate representative must immediately pay estate taxes on the funds set aside in the “C” trust.  Similar to the “B” trust, the assets in the “C” trust can continue to grow but no additional estate taxes will be assessed at the time the “C” trust is distributed.

Choice 2. Your trust instructions can provide the excess assets be given to the “A” trust.  The excess assets will now be under the control of the surviving spouse.  The distribution of the assets will be done according to the terms of the “A” trust when the surviving spouse dies.

No estate taxes are due on the excess assets.  When the surviving spouse dies, all of the assets in the “A” trust will be subject to any applicable estate taxes.


Do you want to live or die in New Jersey?

Several years ago after my dad died in New Jersey, my brother and I were shocked when we realized how much money we were going to have to pay to the state in inheritance and estate taxes. The percentage was huge, especially compared to almost any other state in the US. Evidently, we were not alone in being shocked by New Jersey’s tax rules.

According to a study recently commissioned by Charles Steindel, chief economist of the New Jersey Department of the Treasury (and former senior vice president of the New York Federal Reserve Bank), 25,000 people moved away from New Jersey between 2004 and 2009. Why? In 2004, the state’s highest income tax rate was raised from 6.37% to 8.97% for those making $500,000 or more, and in 2009 a one year 10.75% tax rate was assessed on those making $1 million or more.

In addition to such high income tax, New Jersey is one of only two states (Maryland is the other) with both a state estate tax and a state inheritance tax; this is a problem for those who would like to leave at least the majority of their wealth to their loved ones when they die.

Steindel also conducted a survey of subscribers to the state’s online newsletter Tax Notes, which keeps professionals such as financial advisers, accountants and attorneys up to date on changes in law, rules and court decisions governing tax matters. Subscribers include advisers to high-wealth clients.

More than half of the respondents said that clients had recently left or expressed interest in leaving the state. Respondents said the top three reasons that clients gave for leaving were state income taxes (85.4 percent), local property taxes (77 percent) and estate taxes (67 percent). The next two reasons most-often cited were retirement (47.6 percent) and housing costs (43.7 percent).

So if you live in New Jersey and you have any assets, consider moving to a more tax friendly, or non-taxing, state like Florida.

Plan For Death

"Just a little bit of planning made my live so much better."

“Just a little bit of planning made my life so much better.”


Dying is not just an emotional event in our life, it is a major financial event as well.  Consider the following possible financial consequences of your death:

  • The paperwork and legal procedures required to settle your estate can cost your family four to eight percent of your net worth.
  • If probate is required, your family’s inheritance can be delayed for months, and in some cases, several years.  During the probate process, the courts decide when your family can sell your personal residence.  Even though your children can’t afford to pay the mortgage.
  • Contract law may override the instructions in your Will or Living Trust
  • Giving your share of your estate directly to your spouse may cost your family hundreds of thousands of dollars.
  • If you or your surviving spouse die without a will, most state intestate laws do not provide for stepchildren.
  • Naming a minor child as a beneficiary can subject the supervision of their money to the probate court.  For a fee.
  • Giving money directly to a minor child with special needs can make the child ineligible for government benefits.
  • Your business may go out of business because no one know how to access digital records.
  • The beneficiary choice of per capita or per stirpes may accidentally disinherit a grandchild
  • Your choice of a beneficiary for your 401(k) or IRA retirement accounts can dramatically change the after death tax deferred value of these accounts.
  • If you don’t have long term care insurance, you must use your assets to pay for long term care.  There may be no assets when you die.
  • Life insurance proceeds may be part of your taxable estate.  If your estate is subject to the federal estate tax, almost half of the life insurance proceeds may be needed to pay the estate tax on the insurance proceeds.


When someone dies, a series of laws and rules determine who has the legal authority to manage the decedent’s financial affairs.

These rules and documents also determine your beneficiaries and the cost, time and effort it will take to settle your estate when you die.  Planning now will save your family money later.

These resources are useful when making plans to keep your money when you die: