A-B Trust

What is an A-B Trust?

An A-B Trust (also known as a Credit Shelter Trust or Bypass Trust) is an estate planning arrangement used by married couples to minimize estate taxes and preserve wealth across generations. It divides assets into two trusts when the first spouse dies — one for the surviving spouse (Trust A) and one that shelters the deceased spouse’s estate from further taxation (Trust B). This structure helps protect family assets while providing ongoing income or benefits to the surviving spouse.

Key Takeaways

• A-B Trusts reduce or eliminate estate taxes by fully utilizing both spouses’ tax exemptions.
• Assets are divided into Trust A (Marital) and Trust B (Bypass/Credit Shelter) after the first spouse’s death.
• The surviving spouse has access to income and limited principal from Trust B but does not own it outright.
• This arrangement ensures the deceased spouse’s tax exemption is preserved for future generations.
• A-B Trusts have become less common due to higher federal estate tax exemptions but remain vital for high-net-worth families.

Understanding an A-B Trust

When the first spouse dies, their share of the couple’s estate (up to the federal estate tax exemption limit) is transferred into Trust B (the Bypass or Credit Shelter Trust). The remainder passes into Trust A (the Marital Trust), which remains under the surviving spouse’s control.

The surviving spouse can receive income and limited distributions from Trust B but cannot alter the trust’s beneficiaries. When the surviving spouse dies, Trust B’s assets pass to the final heirs (typically children) without additional estate taxation. This ensures that both spouses’ exemptions are utilized efficiently.

While tax reform — notably the Tax Cuts and Jobs Act of 2017 (TCJA) — increased estate tax exemption limits, A-B Trusts still play a key role in:

• State-level estate tax planning, where thresholds are lower.
• Blended families, ensuring assets are protected for children from prior marriages.
• Asset protection and probate avoidance, offering financial security and privacy.

Formula (If Applicable)

While no mathematical formula governs an A-B Trust, the structure can be represented conceptually:

Estate Value = Trust A (Marital Trust) + Trust B (Credit Shelter Trust)
Where:

• Trust A provides full control to the surviving spouse.
• Trust B shelters the deceased spouse’s assets up to the exemption limit.

Real-World Example

Imagine a couple, Michael and Sandra, with an estate valued at $20 million. Upon Michael’s death, $13.61 million (the 2024 federal exemption) moves into Trust B to avoid taxation. The remaining $6.39 million goes into Trust A, controlled by Sandra. When Sandra later passes away, Trust B’s assets transfer directly to their children tax-free, while only Trust A’s value is subject to estate tax.

Importance in Business or Economics

A-B Trusts are essential tools for wealth preservation, intergenerational planning, and tax efficiency. For high-net-worth individuals, they ensure that family wealth is passed down strategically while reducing potential tax liabilities.

Business owners and investors also use A-B Trusts to ensure continuity — allowing ownership interests, private assets, or company shares to be distributed according to long-term succession plans while maintaining estate tax benefits.

Types or Variations

• A-B-C Trust: Adds a third trust (Trust C) to handle special assets or those qualifying for unique deductions.
• Disclaimer Trust: Allows the surviving spouse to decide whether to use an A-B structure after the first spouse’s death.
• QTIP Trust (Qualified Terminable Interest Property): Provides the surviving spouse with income while controlling the ultimate distribution to heirs.

Related Terms

• Estate Tax Exemption
• Credit Shelter Trust
• Marital Deduction
• QTIP Trust
• Portability

Sources and Further Reading

• Internal Revenue Service (IRS) Estate Tax Guide: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
• Investopedia – A-B Trust Definition: https://www.investopedia.com/terms/a/a-btrust.asp
• Nolo – Estate Planning with A-B Trusts: https://www.nolo.com/legal-encyclopedia/a-b-trusts-overview.html

Quick Reference

• Trust A: Marital Trust, controlled by the surviving spouse.
• Trust B: Credit Shelter Trust, protected from estate tax.
• Exemption Limit: The maximum estate value excluded from taxation.
• Bypass Mechanism: Allows assets to pass to heirs tax-free after the surviving spouse’s death.

Frequently Asked Questions (FAQs)

What is the main purpose of an A-B Trust?
To minimize estate taxes by using both spouses’ exemptions efficiently while providing financial support for the surviving spouse.

Can the surviving spouse modify Trust B?
No. Trust B is irrevocable after the first spouse’s death, though the spouse may receive income and limited distributions.

Are A-B Trusts still necessary today?
They remain valuable for high-net-worth families and in states that impose their own estate or inheritance taxes.

What happens if estate laws change?
Modern trusts include flexibility through disclaimers or powers of appointment, allowing adaptation to tax law updates.