A lot of people talk about A-B trusts.

The reality is, most of these weirdly named trusts have purposely been shrouded in mystery to further the legal industry’s goal of confusing the public into unnecessary upsells.

While I do think the A-B trust is valuable, it really only saves the day if you are incredibly wealthy (like most trusts.) Or, if you want to control how your spouse spends your money after you die.

Before discussing the A-B trust, you need to know a little bit about taxes.

If you die, everything you leave behind is called your “estate.” This doesn’t just include money, it includes the houses you own, the cars, your bank accounts, robinhood accounts, 401k, etc.

Your “gross” estate is the total dollar amount of every single thing you own. So, if you have a house worth $200k and $50k in your 401k and $10k in your bank account then your gross estate is worth $200k + $50k +$10k = $260k.

If you died the state would look at that number and see if any taxes are due.

In Massachusetts, you don’t pay a dime in taxes if your gross estate (minus certain deductions) is worth under $2,000,000.

So if you have a $260k estate you just wouldn’t pay taxes at all.

Your stuff would go to your kids or spouse.

But lets say you had $3,000,000 in your bank account. Now you’re worth over $2,000,000 which means there is an estate tax due.

But, here’s another little fact you need to know. Anything you pass to your wife is untaxed, no matter how much. That’s called the “marital deduction,” where anything that you leave to your spouse is deducted when calculating your gross estate.

So if you’re worth $3,000,000… even though a tax is due, whatever you give to your spouse will be deducted from the taxable amount. So if you give all $3m to your spouse, the tax calculation for your gross estate would be $3m-$3m = $0. Your estate is worth $0 so no taxes are due.

If you gave $500k to your spouse, you’d do $3,000,000 – $500k = $2,500,000. That amount is over $2m so an estate tax would still be due.

In situations like this you can use an A-B trust to minimize taxes.

You can give $1,000,001 to your wife in your “A” trust and that passes to her untaxed and that number is deducted from your estate because you gave it to your spouse.

Now your estate is left with $1,999,999 and you put it into the “B” side of your trust. And you list your kids as beneficiaries. That passes to them untaxed because it’s under $2m and no taxes are due.

That is the synopsis of an A-B trust.

You have the A side that goes to your wife tax free, and the B side that goes to your kids tax free.

If you didn’t do an A-B trust you’d have to pay taxes on the full $3m.