Legal Definitions - surviving spouse's trust

A surviving spouse's trust, often referred to as an "A trust" within an "AB trust" structure, is a specific type of trust established by a married couple as part of their estate plan. Its primary purpose is to hold a portion of the couple's assets after the first spouse passes away, granting the surviving spouse significant control and access to those assets. This trust allows the surviving spouse to manage, invest, and typically use the income and principal from the trust for their needs, while still being part of a broader strategy to manage estate taxes and distribute assets to beneficiaries later.

An AB trust scheme involves dividing a couple's assets into two separate trusts upon the death of the first spouse: the "A trust" (surviving spouse's trust) and the "B trust" (also known as a bypass or credit shelter trust). Historically, this structure was widely used to maximize federal estate tax exemptions for both spouses. While changes in federal law have made the AB trust less common for federal estate tax planning due to "portability" (allowing the surviving spouse to use the deceased spouse's unused exemption), it remains a valuable tool for managing state estate taxes, protecting assets, or providing for specific beneficiaries.

• Example 1: Providing for a Spouse with Flexibility

  Scenario: John and Mary, a married couple with significant assets, establish an AB trust. When John passes away, a portion of their combined assets is transferred into the surviving spouse's trust (the A trust) for Mary. The remaining assets go into the B trust.

  Illustration: In this case, the surviving spouse's trust allows Mary to be the trustee and beneficiary of the assets held within it. She can decide how to invest these funds, withdraw principal if needed for her living expenses, and generally manage this portion of their estate with considerable flexibility. This ensures she is financially secure and has control over a substantial part of their wealth without immediate restrictions, while the B trust holds assets that will eventually pass to their children, potentially bypassing Mary's estate for tax purposes.

• Example 2: Managing State Estate Taxes

  Scenario: David and Sarah live in a state that imposes its own estate tax, which has a lower exemption threshold than the federal estate tax. They decide to set up an AB trust to minimize their state estate tax liability.

  Illustration: Upon David's death, assets up to the state's exemption amount are allocated to the B trust, which is designed to pass to their children without being included in Sarah's taxable estate. The remaining assets, which Sarah needs for her support and wants to control, are placed into the surviving spouse's trust (the A trust). This arrangement allows Sarah to maintain control and access to a significant portion of their wealth, while the B trust effectively "shelters" assets from state estate taxes upon her eventual death, demonstrating how the A trust functions alongside the B trust for specific tax planning goals.

• Example 3: Blended Family Asset Protection

  Scenario: Robert and Lisa are in a second marriage, and both have children from previous relationships. They want to ensure the surviving spouse is well-provided for, but also guarantee that their respective children ultimately inherit a fair share of their individual assets.

  Illustration: They establish an AB trust. When Robert dies, assets intended for Lisa's direct use and control are placed into the surviving spouse's trust (the A trust). This allows Lisa to manage these funds, make investment decisions, and use them for her lifestyle without restriction. Assets specifically designated for Robert's children, up to the exemption amount, are placed into the B trust, which is irrevocable and ensures those assets are preserved for his children after Lisa's passing. The A trust here provides Lisa with immediate financial security and autonomy over a portion of the estate, while the overall AB structure balances her needs with the long-term inheritance goals for both sets of children.