Planning for the future of your estate can be a daunting task, especially when it comes to complex legal terms and concepts. That’s why it’s important to understand exactly what is meant by a “Formula AB Trust.” A Formula AB Trust is a particular type of trust designated by California law and is often used to reduce estate taxes for individuals with considerable assets.
What Is a Formula AB Trust?
Broadly speaking, a trust is a financial arrangement in which one person, known as the “trustor,” entrusts assets to another person, known as the “trustee,” to be held and managed in trust for the beneficiaries. A Formula AB Trust arises as a result of California’s community property laws. Generally, California law provides that assets acquired during marriage are owned jointly by both spouses and, upon death, the surviving spouse is able to pass the assets directly to their heirs. This is because, under the community property laws, the deceased spouse’s share of the assets automatically transfers to the surviving spouse. To avoid this automatic transfer, some couples separate their assets into a Formula AB Trust. This trust splits the trustor’s estate into two trusts – the A trust and the B trust.
How Does a Formula AB Trust Benefit Your Estate Planning?
A Formula AB Trust allows individuals to transfer assets to the two trusts and, upon the death of the first spouse, both the A trust and the B trust are identified by the individual’s will. The A trust is for assets that would otherwise go to the surviving spouse, while the B trust is for assets that are intended to be passed to other beneficiaries (i.e., children, grandchildren, etc.). In this way, a Formula AB Trust can reduce estate taxes for individuals with considerable assets, as the B trust is generally subject to lower tax rates than the A trust.
Final Thoughts
When it comes to your estate planning it’s important to understand all the options available to you. A Formula AB Trust can be a great way to reduce estate taxes and secure your family’s future. Be sure to consult with an experienced estate planning attorney to get the most out of your estate plan.