Term: A-B Trust
Type: Estate planning tool
Also known as: Bypass Trust, Credit Shelter Trust
Common in: United States
Used by: Married couples for tax-efficient estate transfers
Definition
An A-B Trust is a legal arrangement used in estate planning by married couples to reduce or eliminate estate taxes when passing assets to heirs. The trust divides into two parts upon the death of the first spouse: Trust A (Survivor’s Trust) and Trust B (Bypass or Credit Shelter Trust).
Key Features
- Two-Part Structure: After one spouse dies, the trust splits into two parts — one for the surviving spouse and one that is irrevocable.
- Estate Tax Reduction: Helps minimize federal estate taxes by taking advantage of both spouses’ estate tax exemptions.
- Control and Protection: The surviving spouse can access the Survivor’s Trust, while the B Trust preserves assets for heirs.
- Irrevocable Trust Component: The B Trust becomes irrevocable upon death and cannot be changed by the surviving spouse.
- Used with Federal Estate Tax Limits: Most useful when estate values exceed the federal exemption threshold.
Common Use Cases
- High-net-worth couples seeking to protect wealth from estate taxes
- Families with children from previous marriages
- Couples living in states with separate state estate taxes
- Preserving assets across generations while maintaining control
Benefits or Advantages
- Reduces or avoids federal estate tax liability
- Protects heirs’ inheritance from remarriage or creditor issues
- Offers asset control even after death of first spouse
- Ensures efficient estate distribution
Examples or Notable Applications
A couple with a combined estate worth $15 million sets up an A-B Trust. When the first spouse dies, $7.5 million is placed in the B Trust and shielded from estate tax. The other $7.5 million remains accessible to the surviving spouse via the A Trust. Upon the second spouse’s death, only the A Trust is taxed.
External Links
This post is for informational purposes only and does not constitute legal or financial advice.