.jpg)
Introduction
An AB Trust is a powerful estate planning tool used primarily to reduce estate taxes and protect assets for beneficiaries, especially in married couples. While it is more prevalent in jurisdictions like the U.S., understanding this concept is useful for high-net-worth individuals, NRIs, and financial planners managing cross-border estates or looking for asset protection strategies.
This article explains what an AB Trust is, how it works, its benefits, examples, and any possible implications for Indian residents with global assets.
Definition
AB Trust: An estate planning tool that splits a married couple's trust into two separate trusts upon the death of the first spouse — Trust A (Survivor’s Trust) and Trust B (Bypass or Decedent’s Trust) — to minimize estate taxes and ensure proper distribution of assets.
Detailed Explanation
1. Structure and Types of AB Trust
When one spouse dies, the AB Trust divides into:
-
Trust A (Survivor’s Trust): The surviving spouse retains full control over this trust.
-
Trust B (Bypass Trust): Holds the deceased spouse’s portion of the estate. It is irrevocable and designed to “bypass” the survivor’s taxable estate.
2. How It Works (With Flow Table)
| Step | Description |
|---|---|
| 1 | Couple creates a joint AB Trust. |
| 2 | First spouse dies. Trust splits into A and B. |
| 3 | Trust B holds assets up to the estate tax exemption limit. |
| 4 | Trust A holds the rest, controlled by the surviving spouse. |
| 5 | Trust B is not included in the surviving spouse’s estate, thus reducing estate taxes. |
3. Why It’s Important
-
Reduces Estate Taxes (especially in jurisdictions with lower exemption limits)
-
Protects Assets from remarriage, creditors, or mismanagement
-
Ensures Smooth Asset Transfer to heirs
4. Real-Life Example
Example:
John and Meera (U.S. citizens living in India) create an AB Trust. John dies, and the estate worth $10 million is split:
-
$5 million goes to Trust B (exempt from Meera’s estate tax).
-
$5 million goes to Trust A, fully under Meera’s control.
If Meera later passes away, only Trust A is considered in her estate for tax purposes.
Accounting Illustration (Journal Entry)
While AB Trusts don’t follow Indian accounting standards, here’s an indicative journal entry for internal tracking:
Tax Implications or Legal Relevance in India
In India, AB Trusts are not commonly used due to differing estate laws. However:
-
NRIs with U.S. or UK citizenship may need AB Trusts to manage dual tax exposure.
-
High-net-worth families with international assets may use AB Trusts as part of global estate planning.
-
While India abolished estate tax (inheritance tax) in 1985, gift tax rules and FEMA (Foreign Exchange Management Act) may still apply on cross-border transfers.
Examples
Numerical Example:
| Scenario | Estate Value | Trust A | Trust B | Tax Benefit |
|---|---|---|---|---|
| Couple’s Joint Estate | $10 million | $5M | $5M | Estate tax saved on $5M |
FAQs: AB Trust
Q1. Is AB Trust applicable in India?
A: Directly no, but NRIs or Indians with U.S. citizenship or global estate planning goals may use it.
Q2. Does India have inheritance or estate tax?
A: No, India currently has no estate tax. But global estate plans must consider laws in other countries.
Q3. What is the main benefit of an AB Trust?
A: It helps married couples reduce estate tax liability while ensuring asset control and protection.
Q4. Can NRIs in India benefit from AB Trusts?
A: Yes, especially if they own property or have tax residency in jurisdictions like the U.S.
Related Terms
Conclusion
An AB Trust might seem complex but is an essential tool in cross-border estate planning. While it may not have direct relevance under Indian tax laws, understanding it is critical for NRIs, global investors, or anyone managing assets across countries. Always consult a financial advisor or estate planner before creating such trusts.