AB Trusts (Bypass Trust or Credit Shelter Trust)

1. AB Trusts(Bypass Trust or Credit Shelter Trust) Jason Coles Karen Merrill Arnie Wolff

2. Why have a Credit Shelter Trust? • The whole idea is how to avoid paying death taxes • Essentially you can transfer an additional $500,000 tax-free to your beneficiaries by paying $2000 if attorney fees • For Married Couples

3. Will vs. Trust • Both are assets designed to transfer assets to beneficiaries upon death • Historically, trusts were the domain of the very wealthy • Traced back to Roman times where money went automatically to oldest son

4. Will • A will is an instrument that is looked at upon your death, it divides your estate • All property is yours until you die • Pertains to one person • Revocable before death

5. Trust • A trust has ownership of the property before your death • A trust is like a corporation, acting on your specific instructions • Can pertain to more than one person • Irrevocable once set up • You transfer assets to the trust to avoid taxes

6. Unified tax credit • Estate tax - when a wealthy person dies, up to 50% of their estate can be subject to estate or death tax • Unified tax credit - The government allows the first $1 million to be transferred to beneficiaries tax-free (actual credit is variable depending on year of death) • Thereafter, the estate is taxed according to death tax tables (high tax rate) • Each person is entitled to a unified tax credit, not everyone uses them

7. Introducing the Black Family Bill Bob Betsy

8. Married couple with inadequate planning • Bob married to Betsy with a $2 million estate (1 son Bill) • Bob dies, leaves entire estate to Betsy under the unlimited marital deduction (which provides no death tax on monies given to spouse) • Betsy lives on $2 million estate • Betsy dies, leaving son Bill $1.5 million • $1 million transferred tax-free under unified tax credit, other million at 50% death tax rate • Bob’s unified tax credit went to waste!

9. Enter the AB trust • Take advantage of Bob’s unified tax credit! • Bob and Betsy create a living trust with AB provision with all their assets (e.g. home, real estate, cars, etc.) • The living trust has specific instructions regarding Bob’s death • Pursuant to the living trust provisions • Upon Bob’s death, 2 trusts are created • Trust B is created containing assets in the amount of the unified tax credit in the year of Bob’s death ($1 million in our example) • All remaining assets are transferred to Trust A (controlled by Betsy)

10. AB Trust cont. • Upon Betsy’s death, $1 million of Trust A is transferred tax-free (Betsy’s unified tax credit) to Bill, any remaining is taxed at death tax rates • Trust B is transferred tax-free (Bob’s unified tax credit) to Bill • AB trust allows Bob’s unified tax credit to be preserved, Bill is $500 grand richer

11. Uncertainty • In 2001, Bush attempted to repeal the death tax – he wasn’t successful in making it permanent • The unified tax credit increases from $675k in 2002 to $3.5 million in 2009 • Estate tax doesn’t exist in 2010 • In 2011 the $1 million exemption is reinstated • The value of the trust is somewhat uncertain (i.e. dying in 2010, it’s worthless) • But the sum of the protection is that trust B can be funded at the appropriate tax credit amount • Caveat: if the death tax is ever permanently repealed, there is no value to an AB trust