Formula AB trusts are simply AB trusts that do not exceed the applicable exclusion amount. AB trusts are a tool used by well-off married individuals to legally maximize their estate tax exemptions.
The strategy involves creating two separate trusts after one spouse passes. Usually, the deceased spouse’s portion of the couple’s property, at least up to the applicable exclusion amount ($12.06 million in 2022 for individuals), is put into trust B (the bypass trust). This trust is irrevocable and will pass to beneficiaries other than the surviving spouse (usually their children). The surviving spouse must follow the trust’s plan without overly benefiting from its operation, but this trust often passes income to the surviving spouse to live on for the rest of their life. The surviving spouse’s portion of the property will be put into trust A. The surviving spouse has control over this trust and may use it as they wish. When the surviving spouse passes, both trusts pass completely to their named beneficiaries. For more information on AB trusts, click here.
[Last updated in February of 2022 by the Wex Definitions Team]
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