A-B Trust

What it is

An A-B trust (also called a bypass trust or credit shelter trust) is a joint trust created by a married couple to reduce federal estate taxes. When one spouse dies, the original joint trust automatically splits into two parts:
– A trust: the survivor’s trust (assets the surviving spouse controls)
– B trust: the decedent’s or bypass trust (assets that bypass the survivor’s taxable estate)

The B trust is typically funded up to the deceased spouse’s available estate tax exemption so those assets are not subject to estate tax when the surviving spouse later dies.

How it works (simple example)

• Married couple estate value at first death: $20 million
• Example federal exemption used in illustrations: $13.99 million
• At the first death, $13.99 million is placed into the B trust (bypass trust) and $6.01 million into the A trust (survivor’s trust).
• The B trust assets are available to the surviving spouse under terms of the trust (income, use of home, etc.) but are not included in the surviving spouse’s estate for estate-tax purposes at their death.
• Without an A-B trust and without portability, the full $20 million could be taxed at the second death; with the A-B split, only assets in the A trust are potentially subject to estate tax at the survivor’s death.

Note: federal exemption amounts and rules change over time. Couples may also use portability (an election that transfers an unused exemption of the first deceased spouse to the survivor) which can affect whether an A-B trust is needed. Portability generally must be elected within a set period after death.

Benefits

• Preserves the deceased spouse’s estate tax exemption by placing that amount into the bypass (B) trust.
• Allows the surviving spouse access to income or use of trust assets if the trust terms permit, while keeping those assets out of the survivor’s taxable estate.
• Prevents “double taxation” of the same assets at both spouses’ deaths.
• Provides built-in trust protections (creditor protection, control over distribution to beneficiaries after the survivor’s death).

Drawbacks and limitations

• More complex and more costly to set up and administer than a simple revocable trust or a will.
• Administrative and legal maintenance can be burdensome.
• Potential for larger capital-gains tax consequences for heirs, depending on basis adjustments.
• Less commonly needed today because federal estate tax exemptions are much larger than in earlier decades.
• Portability (if elected and available) can make an A-B trust unnecessary for many couples.

Who uses an A-B trust

A-B trusts are generally used by couples whose combined estates exceed the applicable federal exemption amounts (or where state estate tax rules make such planning advantageous). They were more common when federal exemptions were much lower; today they’re mainly for higher-net-worth couples or situations where portability is not elected or doesn’t address state-level estate taxes.

Other names

• Bypass trust
• Credit shelter trust
• Decedent’s trust (B trust)

Bottom line

An A-B trust is a traditional estate-planning tool that preserves a deceased spouse’s estate tax exemption and keeps those assets out of the survivor’s taxable estate while still providing limited access for the survivor. Because federal exemptions have grown and portability is available, many couples no longer need an A-B trust. Couples with large estates or complex planning needs should consult an estate-planning attorney or tax advisor to determine whether an A-B trust—or another strategy—is appropriate.