What is AB trust?

An AB Trust is a type of trust used by married couples to minimize estate taxes and protect assets for their heirs. It splits into two separate trusts (Trust A and Trust B) upon the death of the first spouse, allowing the couple to maximize their estate tax exemptions.

AB trust is usually set up in a way that it is revocable when the couple are both alive, but Trust B will become irrevocable upon death of the first spouse.

How an AB Trust Works:

  1. Creation: A married couple establishes a joint AB Trust, often as part of a living trust.
  2. Upon First Spouse’s Death: The trust divides into two sub-trusts:
    • Survivor’s Trust (Trust A): The surviving spouse retains control over these assets and can use them during their lifetime.
    • Bypass Trust (Trust B, or Credit Shelter Trust): This portion is irrevocable and bypasses the surviving spouse’s taxable estate, but they may still receive limited income or benefits from it.
  3. Tax Benefits: Each spouse’s estate tax exemption is fully utilized, reducing or eliminating federal estate taxes when the second spouse dies.
  4. After Second Spouse’s Death: The remaining assets pass to the beneficiaries (e.g., children) with minimized tax liability.

Key Benefits:

  • Estate Tax Savings: Maximizes both spouses’ federal estate tax exemptions (currently $13.61 million per person in 2024).
  • Asset Protection: The Bypass Trust shields assets from creditors and future spouses.
  • Control Over Distribution: Ensures assets ultimately go to designated heirs (e.g., children from a prior marriage).

Drawbacks:

  • Complexity & Cost: Requires legal setup and ongoing management.
  • Irrevocability: The Bypass Trust cannot be changed after the first spouse’s death.
  • State Taxes: Some states have lower estate tax thresholds, which may still apply.

Alternatives:

  • ABC Trust (with a QTIP Trust): Used for blended families.
  • Revocable Living Trust: Simpler but lacks tax benefits.
  • Portability Election: Under federal law, spouses can transfer unused estate tax exemptions without an AB Trust (but state rules may differ).

Is an AB Trust Right for You?

AB Trusts are most useful for married couples with large estates (exceeding the federal or state exemption limits).