In the portability era, which is NOT an advantage of A-B trust planning?

In the portability era, which is NOT an advantage of A-B trust planning?

• A. Appreciation out of the surviving spouse's estate
• B. Decreased income tax for trust income retained in the trust
• C. Preservation of the full GST exemption
• D. Asset protection for the surviving spouse

Answer: (B)

In this planning context, keeping income inside a separate trust (the bypass or A-B trust) changes how that income is taxed. If the trust retains income, it is taxed at the trust’s own tax rate schedule, which is designed to hit higher brackets much sooner and generally results in higher taxes than when the same income is taxed to a beneficiary at their personal rate. Distributing income to the surviving spouse shifts that tax burden to the spouse’s individual rate, which is often more favorable. Portability lets the surviving spouse use the deceased spouse’s unused estate tax exemption, but it doesn’t magically lower the tax the trust pays on income that remains in the trust. That combination means the idea of decreased income tax for trust income retained in the trust isn’t correct.

In this planning context, keeping income inside a separate trust (the bypass or A-B trust) changes how that income is taxed. If the trust retains income, it is taxed at the trust’s own tax rate schedule, which is designed to hit higher brackets much sooner and generally results in higher taxes than when the same income is taxed to a beneficiary at their personal rate. Distributing income to the surviving spouse shifts that tax burden to the spouse’s individual rate, which is often more favorable. Portability lets the surviving spouse use the deceased spouse’s unused estate tax exemption, but it doesn’t magically lower the tax the trust pays on income that remains in the trust. That combination means the idea of decreased income tax for trust income retained in the trust isn’t correct.