An irrevocable trust created by a married couple to avoid probate and minimize federal estate tax. An AB trust is created by each spouse placing property into a trust and naming someone other than his or her spouse as the final beneficiary of that trust. Upon the death of the first spouse, the surviving spouse does not own the assets in that spouse's trust outright, but has a limited power over the assets in accordance with the terms of the trust. Such powers may include the right to receive interest or income earned by the trust, to use the trust property during his or her lifetime, e.g. to live in a house, and/or to use the trust principal for his or her health, education, or support. Upon the death of the second spouse, the trust passes to the final beneficiary of the trust. For estate tax purposes, the trust is included in the first, but not the second, spouse's estate and therefore, avoids double taxation.
Definition from Nolo’s Plain-English Law Dictionary
A trust that allows couples to reduce or avoid overall. Each spouse puts property in the AB trust. When the first spouse dies, his or her half of the property goes to the named in the trust -- commonly, the couple's grown children -- with the crucial condition that the surviving spouse has the right to use the property for life and is entitled to any income it generates. The surviving spouse may even be allowed to spend principal in certain circumstances. When the surviving spouse dies, the property passes to the trust beneficiaries. It is not considered part of the second spouse's for estate tax purposes. Using this kind of trust keeps the second spouse's taxable estate half the size it would be if the property were left directly to the spouse. (See also: bypass trust
, credit shelter trust
Definition provided by Nolo’s Plain-English Law Dictionary.
August 19, 2010, 5:10 pm