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What is an A-B Trust?

Understanding A-B Trusts

An A-B trust, also known as a Credit Shelter Trust, is a joint trust created by married couples with the aim of minimizing estate taxes and preserving wealth for future generations. This article will delve into the intricacies of A-B trusts, exploring their purpose, structure, and potential benefits for estate planning.

The Purpose of an A-B Trust

The primary objective of an A-B trust is to take advantage of estate tax exemptions available to married couples. Each spouse has an estate tax exclusion amount (also known as the unified credit) that allows them to pass a certain value of assets to their beneficiaries free from estate taxes. However, with the A-B trust strategy, both spouses can maximize their exclusion amounts and potentially reduce or eliminate estate taxes altogether.

Structure of an A-B Trust

An A-B trust is initially formed as a joint trust where both spouses place assets into the trust. The trust is structured in a way that upon the death of one spouse, it splits into two separate entities: the survivor's trust (Trust A) and the decedent's trust (Trust B).

  • Survivor's Trust (Trust A): The survivor's trust, also known as the marital trust, holds the assets of the surviving spouse. The surviving spouse has control and access to the assets in this trust and can use them for their benefit. They may also receive income generated by the trust's assets.

  • Decedent's Trust (Trust B): The decedent's trust, also referred to as the bypass trust, holds the assets of the deceased spouse. The assets placed in this trust are excluded from the surviving spouse's estate and are not subject to estate taxes upon their death. The surviving spouse may have limited control over the decedent's trust, but the terms of the trust can be designed to allow them access to the assets and even receive income from them.

Benefits and Considerations of A-B Trusts

A-B trusts offer several benefits for married couples engaged in estate planning:

  1. Minimizing Estate Taxes: By utilizing the A-B trust structure, married couples can take full advantage of their individual estate tax exemptions. This can significantly reduce or eliminate estate taxes that would otherwise be imposed on their assets.

  2. Preserving Wealth for Future Generations: A-B trusts help ensure that a significant portion of the couple's assets is preserved for the benefit of their children or designated beneficiaries. This can provide financial security and support for future generations.

  3. Creditor Protection: Assets placed in the bypass trust (Trust B) are shielded from potential creditors, offering an added layer of protection for the wealth held within the trust.

While A-B trusts have been commonly used in the past, it's important to note that changes in estate tax laws have made them less relevant for many estates. The current estate tax exemption, which is indexed to inflation, provides a sufficient threshold for most estates to pass on their assets without incurring estate taxes.

Potential Disadvantages of A-B Trusts

Although A-B trusts offer significant advantages, they may not be suitable for every situation. Some potential drawbacks include:

  1. Maintenance Costs: Establishing and maintaining an A-B trust can involve additional administrative costs and legal fees. It's essential to consider these ongoing expenses when evaluating the suitability of this strategy.

  2. Complex Structure: A-B trusts can have complex structures and require careful planning to ensure they are implemented correctly. Consulting with an experienced estate planning attorney is crucial to navigate the intricacies of this trust arrangement.

  3. Capital Gains Taxes: While A-B trusts are designed to minimize estate taxes, they may result in potential capital gains taxes for beneficiaries when they sell inherited assets. This should be taken into account when considering the long-term implications of the trust.

A-B trusts, or Credit Shelter Trusts, offer married couples a means to minimize estate taxes and preserve wealth for future generations. By taking advantage of individual estate tax exemptions and structuring assets within the trust, couples can potentially reduce or eliminate estate taxes on a significant portion of their estate. However, it's important to consider the evolving estate tax landscape and consult with professionals to determine the most appropriate estate planning strategies for individual circumstances.


An A-B Trust is a plan which actually creates two trusts at the death of the first spouse, and is a strategy intended to avoid as much estate tax risk as possible.

Each spouse has an estate tax exclusion amount of $5.45 Million, and laws have made unused exclusion amounts fully portable to the surviving spouse, but for our purposes here, most of the exemption will be used up. So a Bypass Trust will be created which uses some amount of the exclusion, and will take that money out of the estate of the surviving spouse. The spouse can still get some income from this trust and have some discretion and control of the principal amount, but cannot use the principal for themselves.

The idea is that the children of the couple are destined to receive the principal amount anyway but for the time being, and in consideration of the fact that the money might very well grow to a significantly larger amount before the death of the surviving spouse, the money is separated from his or her estate to avoid putting their estate over the exclusion limit.

So the remaining amount not included in the Bypass Trust, which is the B Trust in the A-B setup, will go either directly to the surviving spouse or into another kind of trust such as a Q-Tip trust (Qualified Terminable Interest Property trust), which designates that even if the spouse remarries, the recipients of the assets in the Q-Tip trust will be the children or designated beneficiaries of the first, deceased spouse and not any new children or step children that are products of the second marriage.

The A-B Trust is also known as a Credit Shelter Trust because it can separate a significant portion of the decedent’s assets from those which can be attached by creditors.

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