Alternate names for A trust: Marital trust, QTIP trust, marital deduction trustAlternate names for B trust: Bypass trust, credit shelter trust, family trust
After one spouse dies, their property is split into two trusts. The surviving spouse has assets in one trust (trust A) that they can use as they like, and that trust will be passed on to beneficiaries when they die. The remaining assets, or the deceased’s portion of the property, are placed into another trust, or a bypass trust (trust B), which is an irrevocable trust that will be also passed onto beneficiaries once the surviving spouse dies. While only for specific circumstances, an AB trust can help ensure some or all of a couple’s assets are passed onto beneficiaries other than a surviving spouse, since the bypass trust is an irrevocable trust. For example, if you and your spouse have a $30 million estate when your spouse dies, with the AB trust, you would put your portion of the estate—say $10 million—into one trust, trust A. Then you would put the remainder of the assets into another trust, trust B. You could use the funds in trust A but the funds in trust B would be an irrevocable trust only for the named beneficiaries (for example, your children). When you die, both trusts are passed to the beneficiary.
How an AB Trust Works
An AB trust only makes sense for couples whose assets are valued at more than the estate tax exemption. In 2022, the estate tax exemption is $12.06 million per person. For a married couple, that means they can pass on up to $24.12 million to their heirs without having to pay federal estate taxes. In this scenario, when the first spouse dies, the assets are placed into two trusts. The first trust, an irrevocable trust, holds funds up to the estate exemption amount ($12.06 million for 2022). The first trust is designated for beneficiaries, but its income can go to the surviving spouse. The remaining assets would be put in another trust for the surviving spouse to control. Depending on the terms of the trust, the funds may be accessed by the spouse or by other beneficiaries, such as the decedent’s children from a previous marriage. The funds are also exempt from estate taxes up to the exemption limit.
AB Trusts vs. Revocable Living Trusts
Because of the large estate exemption limits, many individuals may prefer a revocable living trust instead of an AB trust. This tool allows an individual to name specific beneficiaries for various assets. So if you don’t want all of your assets to pass onto your spouse or you’re already a surviving spouse, you can make clear estate decisions with a much more flexible trust. And because it’s revocable, it can be changed throughout a person’s lifetime.
Pros and Cons of an AB Trust
Pros Explained
Can reduce estate taxes: Some states, including Maine, New York, and Vermont, do not allow a surviving spouse to use the full couple estate exemption. Instead, it’s reduced to the individual exemption limit.Avoids probate: Trusts are not subject to probate, so your assets can be passed on without the lengthy probate process.Assets go to beneficiaries: You can ensure beneficiaries other than your spouse inherit your assets.
Cons Explained
Often unnecessary: Only couples with more than $24.12 million in assets in some scenarios see tax benefits from an AB trust. Portability allows one spouse to use their deceased spouse’s unused estate tax exemption plus their own exemption.Higher costs than will or standard trust: Complex trusts such as an AB trust are typically more expensive than a standard trust or a will. They require more time from attorneys because of their complexity.
How To Get an AB Trust
You’ll need a professional estate planning attorney to create an AB trust. A trusted lawyer can help ensure the language and terms of the trust fits the IRS requirements and that both spouses’ wishes are addressed.
