BUSI 354- DB REPLY

LaTonya and her husband, Jean Paul, have been married 8 years and have 2 children together. LaTonya also has a child from a previous relationship, Tracy. If LaTonya died today, her gross estate would have a fair market value of $6,800,000. She has made no lifetime transfers. Reply to a classmate’s description of the ABC Trust Arrangement, explaining how such an arrangement could provide for Jean Paul and the 2 children, as well as for Tracy, while fully utilizing the marital deduction, estate tax credits, and other planning tools.

REPLY TO THE THREAD BELOW  200 WORDS 

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Dear LaTonya,

Married couples have the ability to maximize their exemption from estate taxes by using an “AB” Trust and this can be setup as part of the couple’s will.  The "A Trust" referred to as a Marital, QTIP, or a Marital Deduction Trust.  The "B Trust" referred to as a Bypass or Credit Shelter Trust ("What Married Couples Should Know About the AB Trust", 2017).  The A and B component of the trust is a joint trust split into two and consists of the Decedent’s Trust and the Survivor’s Trust.  The Decedent’s Trust is funded up to the maximum amount which is currently $5.25M and can pass tax free in the year of death and the balance into the Survivor’s Trust ("FAQs - Living Trusts On The Web", 2017).  The Decedent’s Trust is considered irrevocable and held for the lifetime of the surviving spouse as the sole trustee.  It is important to note that the Survivor’s Trust is protected from creditors and the beneficiaries of the trust cannot be anyone else but the Decedent’s children ("FAQs - Living Trusts On The Web", 2017).  The balance of funds in the Survivor’s Trust qualifies for the unlimited marital deduction and there is no tax due.  Upon the death of the survivor, the trust is subject to the tax on the amount that exceeds the exemption amount in the year of death.  One of the perks here is that because the trust is irrevocable and the Decedent’s Trust was already subject to tax, the estate is not subject to estate taxes ("FAQs - Living Trusts On The Web", 2017).  As a result of TRA 2010 and ATRA 2012, a new trust was introduced called the “Marital Deduction Trust” also known as the QTIP (Qualified Terminable Interest Property Trust).  This qualifies the Survivor’s Trust for the unlimited marital deduction and as a result, there is no tax due at the first death.  When the surviving spouse passes, the Decedent’s Trust is treated as part of the survivor’s taxable estate and the remaining assets receives a new basis adjustment, also known as a step-up.  This provides the beneficiaries of the estate to sell without any capital gains tax implications ("FAQs - Living Trusts On The Web", 2017).

I hope this information was beneficial for you.

Blessings,

Irena

References

FAQs - Living Trusts On The Web. (2017). Livingtrustsontheweb.com. Retrieved 3 March 2017, from http://livingtrustsontheweb.com/pages/faq.html

What Married Couples Should Know About the AB Trust. (2017). The Balance. Retrieved 3 March 2017, from https://www.thebalance.com/what-is-an-ab-trust-3505380