Also known as a B trust, credit shelter trust or bypass trust, the family trust is part of a system financially-savvy, married couples use to minimise estate taxes.
When a person dies, his estate, or the money and property he has left behind, is often subject to estate taxes. Whether or not the money will be taxed depends on the estate tax threshold for the tax year in which the death occurs. In a year during which the estate tax threshold is £1.9 million, for example, an estate totalling less than £1.9 million would not be taxed. In the case of estates with a value greater than £1.9 million, only the value of the money exceeding £1.9 million would be taxed.
If a married couple's property exceeds the estate tax threshold, they can still avoid paying estate taxes by setting up an AB trust. In an AB trust system, when the first spouse dies, instead of leaving her entire one-half share of a joint estate to her surviving partner, she places the amount exempt from estate taxes that year in the B trust, or family trust. If her half of the estate exceeds that value, the rest of it will go into the A trust. The surviving spouse will receive all income from the A trust, and the money in the A trust must be used for his benefit.
The Family Trust
Whereas the A trust must be used for the benefit of the surviving spouse, the B trust is more flexible. The remaining partner certainly can benefit from it in several ways, including by receiving the interest earned by the money in the trust or continuing to live in a house that is part of the trust. However, the reason the money is put into the trust in the first place is so that the surviving spouse is not the actual owner or beneficiary of this part of the estate. This means that when he also dies, the value of the trust will not count toward his estate value. Therefore, his estate is less likely to exceed the estate tax threshold and estate taxes are less likely to be due. Upon the death of the second spouse, the money and property contained in the family trust will be left to the trust's named beneficiaries--usually the couple's children.