A-B Trust

What Is an A-B Trust?

An A-B trust is an estate planning arrangement, most often used by married couples, that begins as a single revocable living trust holding both spouses' assets. When the first spouse dies, the trust divides into two separate trusts, labeled A and B. The structure is designed so that both spouses' estate tax allowances can be used, rather than only one.

How It Works

While both spouses are living, the trust is usually revocable, meaning they can change it and keep control of the property. After the first spouse dies, the trust is generally split into two parts:

• The A trust, often called the survivor's trust, holds the surviving spouse's share. It typically remains revocable, so the survivor can still manage and change it.
• The B trust, often called the bypass or credit shelter trust, receives assets up to the deceased spouse's available estate tax exemption. It usually becomes an irrevocable trust at that point, so its terms are fixed.

The surviving spouse may be entitled to income from the B trust and, depending on the terms, limited access to its principal. Because the B trust's assets are generally not treated as owned by the survivor, they are typically left out of the survivor's taxable estate when that spouse dies.

An Example

Suppose a couple's combined property is worth more than one spouse's exemption. If all of it passed outright to the survivor, the excess could later be counted in the survivor's estate and could face estate tax. With an A-B structure, an amount equal to the first spouse's unused exemption is placed in the B trust, keeping that portion outside the survivor's estate while the rest passes through the A trust.

Advantages and Disadvantages

A-B trusts can help a couple use both exemptions, let the first spouse set terms for property that goes to children from an earlier relationship, and, when assets are properly titled to the trust, help them avoid probate.

They are more complex to draft and administer, require a trustee to manage the B trust, and the B trust's irrevocability limits flexibility. Costs can be significant relative to modest estates. In places without an estate tax, the structure may serve little purpose. In the United States, a deceased spouse's unused exemption can also be transferred to the survivor through portability, which for some couples reduces the need for a B trust. Estate rules change over time, so the suitability of this arrangement depends on individual circumstances and applicable law.