What is an A‑B trust?
An A‑B trust is a form of joint revocable trust used by married couples to reduce federal estate taxes when the first spouse dies. On the first death the original joint trust splits into two trusts: the “A” trust (survivor’s trust) that the surviving spouse controls, and the “B” trust (bypass trust, credit‑shelter trust, or decedent’s trust) that holds assets sheltered from the surviving spouse’s taxable estate.
Key terms (defined)
– Revocable trust: a trust you can change or cancel while you’re alive.
– Irrevocable trust: a trust that generally cannot be changed once funded.
– Marital deduction: a federal tax rule that lets assets passing to a surviving spouse avoid estate tax at the first death.
– Portability: the ability to transfer the unused federal estate tax exemption of a deceased spouse to the surviving spouse (requires proper filing).
How the split works — step by step
1. Husband and wife create a joint revocable trust and fund it with assets.
2. When the first spouse dies, the trust instructions direct a split: part of the assets move into the irrevocable B (bypass) trust up to the value that uses the deceased spouse’s estate tax exemption; the remainder stays in the A (survivor’s) trust.
3. The surviving spouse typically can receive income from the B trust and sometimes limited principal under specified terms, but the B trust assets aren’t included in the survivor’s estate for federal estate tax purposes.
4. When the surviving spouse dies, assets in the survivor’s A trust are part of their taxable estate; assets remaining in B pass to the named beneficiaries shielded from further estate tax because they already used the deceased spouse’s exemption.
Why couples created A‑B trusts
Historically, A‑B trusts were a standard way to use both spouses’ estate tax exemptions and avoid double taxation when exemptions were low. They also allow the first spouse’s exemption to be “locked in” and provide control over which beneficiaries ultimately receive sheltered assets.
Why A‑B trusts are less common now
Two changes have reduced the need for A‑B trusts for many couples:
– Much higher federal exemption amounts (the example below uses the 2025 individual exemption of $13.99 million).
– Portability: by filing a federal estate tax return (Form 706) within the required period, the surviving spouse can add the unused exemption of the first spouse to their own exemption, often avoiding the need to split a trust.
Checklist: When to consider an A‑B trust
– Combined estate value significantly exceeds the current individual exemption (e.g., > $13.99M in 2025).
– You want to lock the first spouse’s exemption into a trust that excludes the survivor’s estate.
– You want to control which beneficiaries receive the sheltered assets (e.g., children from a prior marriage).
– You are comfortable with added legal/planning costs and ongoing trust administration.
– You are aware portability exists and have evaluated whether portability plus a simple trust or wills might be a better option.
Trade‑offs and downsides
– Complexity and cost: setting up and administering two trusts is more expensive and administratively heavier than a single revocable trust or relying on portability.
– Potential tax complications: depending on circumstances, asset basis treatment and capital gains exposure can differ; plan with a tax advisor.
– Not a universal creditor shield: bypass trusts provide estate tax sheltering and distribution control, not guaranteed protection from all creditors.
– State estate or inheritance taxes: some states have their own rules and lower thresholds; federal planning doesn’t always address state taxes.
Worked numeric example (using 2025 federal numbers)
Assumptions:
– Couple’s estate at first death: $20,000,000.
– 2025 federal individual estate tax exemption: $13,990,000.
– Top federal estate tax rate (used here for illustration): 40%.
– No portability claimed.
Scenario A — no A‑B trust and no portability:
– At first death: unlimited marital deduction allows the surviving spouse to receive $20,000,000 free of federal estate tax at that moment.
– At second death: surviving spouse’s estate is $20,000,000. Taxable amount = $20,000,000 − $13,990,000 = $6,010,000.
– Federal estate tax ≈ 40% × $6,010,000 = $2,404,000.
– Amount remaining for beneficiaries ≈ $20,000,000 − $2,404,000 = $17,596,000.
Scenario B — A‑B trust funded at first death:
– On first death, $13,990,000 moves into the irrevocable B (bypass) trust; $6,010,000 remains in the survivor’s A trust.
– The B trust has used the first spouse’s exemption; those assets are not part of the surviving spouse’s estate later.
– At second death: only the $6,010,000 in A trust is compared to the surviving spouse’s exemption. If the survivor still has a $13,990,000 exemption, that $6,010,000 is fully sheltered and no federal estate tax is due. Beneficiaries receive both trusts’ assets with no further federal estate tax.
Scenario C — portability elected at first death:
– If the executor timely files Form 706 and elects portability, the surviving spouse’s exemption becomes $13,990,000 + 13,990,000 = $27,980,000, which is larger than the $20,000,000 estate. No federal estate tax is due at the second death, and an A‑B trust may be unnecessary for tax reasons (though it could still be used for non‑tax objectives).
Practical steps if you’re evaluating an A‑B trust
1. Estimate combined estate and include likely appreciation.
2. Check current federal exemption and whether state estate/inheritance taxes apply.
3. Decide whether portability is an acceptable alternative (requires timely tax return filing).
4. Discuss non‑tax goals (control, remarriage protection, creditor concerns) with an estate planning attorney.
5. If choosing an A‑B trust, draft precise trust language about distributions and powers, and plan trustee selection and successor trustees.
6. Periodically review the plan as laws and estate values change.
Sources for further reading
– Investopedia — A‑B Trust: https://www.investopedia.com/terms/a/a-b-trust.asp
– Internal Revenue Service (IRS) — Estate Tax: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
– Tax Foundation — Federal Estate Tax Basics: https://taxfoundation.org/estate-tax/
– Cornell Legal Information Institute — Bypass Trust (credit shelter trust): https://www.law.cornell.edu/wex/credit_shelter_trust
Educational disclaimer
This explainer is for educational purposes only and does not constitute tax, legal, or investment advice. Laws and exemption amounts change; consult a qualified estate planning attorney or tax professional before making decisions.