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Horizon Elder Law & Estate Planning Blog

Friday, February 8, 2019

Understanding AB Trusts

Are AB trusts still a solid estate planning tool for married couples?

An AB trust is a joint trust created by a married couple with the goal of minimizing estate taxes.  AB trusts are unique in that the trust will divide into two when the first spouse passes away.  Assets from both spouses will be placed into the trust and the trust will name a beneficiary, or multiple beneficiaries, who can be anyone besides the other spouse.  Trust A is known as the survivor’s trust or Marital Trust, while Trust B is the decedent’s trust or Bypass Trust.  AB trusts have become less common in recent years due to some changing estate tax laws, but under some circumstances, they still hold an important purpose in estate planning in California

AB Trusts and Shifting Tax Laws

In 2011, the federal estate tax exemption was altered to become transferable between married couples. The exemption became “portable” as it is termed, meaning that now if one spouse passes away and his or her whole estate tax exemption is not needed, then the unused portion can be applied to the surviving spouse’s estate tax exemption.  As such, married couples can now pass down in excess of $10 million to their heirs without the need to pay federal estate taxes, and without the need to create an AB trust.


While the changing estate tax laws reduced the need for AB trusts in some situations, it did not completely eliminate their usefulness.  First, California and most other states enforce statewide estate taxes that are generally not portable. AB trusts are often thus required to reduce state taxation for both spouses.  Further, in cases in which the spouses both have different sets of beneficiaries, such as when the spouses have children from other marriages, the AB trust could prove important.  Lastly, the generation skipping transfer tax exemption is not portable, so couples can use the AB trust to double this exemption and reduce their taxes even further.


There are several ways to implement an AB trust structure.  Generally, language will be inserted into the couple’s revocable living trust that will create a dual trust.  Next, the assets will need to be divided into each spouse’s individual name.  This can be a difficult step if the couple has a lot of assets in joint accounts or property. Your estate planning lawyer will assist you in determining whether the AB trust is right for you and completing the next steps to start your trust.


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