Advanced Underwriting Consultants

Question of the Day – May 18

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: How does A/B planning work?

Answer: For many, A/B planning meant that at the first spouse’s death, the decedent’s estate was divided into two parts:

  • The marital part (the “A” part), which was treated as going to the surviving spouse for federal estate tax purposes, and

  • The bypass part (the “B” part), which was treated as going to the kids for estate tax purposes.

The bypass part is sometimes also referred to as the credit shelter portion, or the exemption part.  Because the bypass part is usually allocated to a trust, it’s the source of the bypass trust.

What has been the traditional main purpose of A/B planning?

If a married couple planned to leave all assets just to the surviving spouse at the first death, there would be no federal estate taxes due at that time because of the unlimited marital deduction.  At the second spouse’s death, the estate would be subject to estate taxes after the surviving spouse’s estate tax exemption was used up.

With proper A/B planning, both the first spouse to die and the second spouse would have gotten credit for their estate tax exemptions—essentially doubling the amount that passed to the kids free from federal estate taxes.

The 2010 Tax Act, passed in December, made any unused federal estate tax exemption at the first spouse’s death portable.  The second spouse to die could add the unused exemption to his or her own exemption, making the total that can pass estate tax free as high as $10 million.  The portable exemption does not require the kind of special estate planning that the A/B technique needed.

A/B planning still fits for some situations, but it is not as universal a tool as it has been in the past.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.