While married couples can make use of AB Trusts to transfer two times the federal estate tax exemption to their heirs free from federal estate taxes, in the handful of jurisdictions that collect a separate state estate tax AB Trust planning will cause part of the B Trust to be taxed for state estate tax purposes immediately after the first spouse dies to the extent that the deceased spouse's estate exceeds the state estate tax exemption.
In response to the gap in some states between the federal and state estate tax exemptions, ABC Trust estate planning was introduced, which in several states allows payment of both federal and state estate taxes to be deferred until after the surviving spouse dies. This is also referred to as "gap trust planning" and making the "state QTIP election." So which states allow for ABC Trust planning?
Current States That Allow for ABC Trust Planning
Of the handful of jurisdictions that currently collect a state estate tax, the following states allow for ABC Trust planning:
- Ohio - through 2012, since Ohio's estate tax was repealed on January 1, 2013
- Rhode Island
In addition, while Vermont law does not currently allow for a state only QTIP election, one commentator on Vermont estate taxes has stated that "representatives of the Vermont Department of Taxes have stated informally that Vermont will recognize whole or partial QTIP elections for properly drafted trusts as long as the election is, or would be, binding for both federal and Vermont estate tax purposes." (See Planning for the Vermont Estate Tax for more about this issue.)
Please refer to the State Estate Tax Chart for information regarding the state estate tax exemptions for the jurisdictions that currently collect an estate tax at the state level and the State Inheritance Tax Chart for information regarding the states that collect an inheritance tax at the state level.