When a married couple in Maryland has accumulated considerable assets before they pass away, they face a more complicated estate planning problem than many people do. If they want to maximize how much they can leave to their heirs, they need to deal with federal taxation on that inheritance as well as state taxes. One process for doing this is a complex maneuver involving ABC trusts.
ABC trusts and their importance
Federal taxes are levied on inheritances with an exemption that varies by year. In 2021, the amount is $11.7 million. Any amount over this is subject to estate tax. However, this tax can be avoided and delayed by using an AB trust process. Under the AB trust, the first spouse to die has their assets placed into two trusts. One contains the exact amount of the federal exemption, and the other contains the rest of the money, and both trusts benefit the surviving spouse. The trust with the federal amount, the B trust, is credited with the first spouse’s exemption, so no taxes are due. The A trust with the leftovers, which is usually smaller, will be subject to income tax but not until the second spouse dies.
Some states have their own estate tax. In those cases, the estate plan will add a third trust, known as the C trust, that contains a third split-off designed to use up the exemption on state estate taxes in the same way.
The process is complex legally, but in execution, it maximizes how much a married couple can leave to their kids or grandkids. In addition, it minimizes the amount of tax they need to pay on that.