August 28, 2025
For decades, married couples used AB trusts—also called credit shelter or bypass trusts—to make sure each spouse’s federal estate tax exemption was fully used. The rise of estate tax portability simplified planning for many families, but AB structures still solve important problems: preserving appreciation for the next generation, protecting inheritances in blended‑family situations, and creating guardrails around spending. This guide explains, in plain English, how an AB trust works, how portability compares, what happens at the first death, and when a modern couple should still consider the structure.
An AB trust is not a single trust—it’s a married‑couple design inside a revocable living trust that splits at the first spouse’s death:
Trust A (Survivor’s or Marital Share). This is the surviving spouse’s share. Depending on the drafting, it remains revocable by the survivor or sits in a marital‑type trust for the survivor’s benefit.
Trust B (Bypass/Credit Shelter Share). This becomes irrevocable at the first death and is funded up to the deceased spouse’s remaining estate tax exemption. Assets in Trust B and their future growth are generally excluded from the survivor’s taxable estate.
The core idea: lock in the first spouse’s exemption by sheltering assets and subsequent appreciation in Trust B, while still allowing the survivor to benefit under defined standards.
Estate tax portability lets the survivor inherit and use the deceased spouse’s unused exemption (a “DSUE” amount) if a timely estate tax return is filed. Portability can be enough for many families—but it has limits:
It does not shelter appreciation inside the survivor’s estate. With an AB design, growth inside Trust B is outside the survivor’s taxable estate.
It provides less control. Portability doesn’t create trustee‑guided distribution standards or creditor protection for family assets.
It depends on paperwork. Someone must actually file the return electing portability; failing to do so forfeits the option.
Bottom line: For couples primarily concerned with simplicity and unlikely to face estate tax, portability can be adequate. For couples focused on appreciation control, blended‑family protections, or spending guardrails, AB planning still has a clear role.
Proper administration—not just the words in your trust—makes an AB plan work.
Date‑of‑death inventory and valuations. The trustee (often the survivor) identifies assets and obtains appraisals where necessary (real estate, closely held interests, unique collections).
Determine the formula. The trust document specifies how to fund Trust B (e.g., “the maximum amount that can pass free of federal estate tax,” considering deductions and the deceased spouse’s remaining exemption).
Allocate assets. Appropriate assets are titled to Trust B (the bypass share); the balance goes to Trust A (survivor’s/marital share). Titling must be changed on accounts and recorded for real property.
Document the allocation. Keep a worksheet tying each asset to its destination with values. Good records drive tax reporting, future accounting, and basis tracking.
Funding mistakes are common and costly. If Trust B is underfunded, the couple loses intended tax and control benefits; if overfunded, there may be unnecessary complexity or lost basis opportunities.
A frequently overlooked topic is income‑tax basis. Property inside the survivor’s taxable estate may receive a later step‑up in basis at the second death. Property sheltered in Trust B may not receive that second step‑up. The tradeoff is real:
If your main goal is estate‑tax minimization or appreciation control, Trust B shines.
If your estate is unlikely ever to face federal estate tax, you might prioritize basis step‑up and flexibility, leaning toward portability or disclaimer planning instead of a rigid AB.
A seasoned approach is to use a disclaimer AB plan (see below), which lets the survivor choose post‑death whether to fund a bypass share depending on then‑current facts.
QTIP‑style marital trust (A‑B‑QTIP). A QTIP trust is a marital trust that qualifies for the marital deduction while controlling ultimate beneficiaries (useful in blended families). It ensures lifetime income and support for the survivor but locks the remainder to chosen heirs. Often used with or instead of a bypass trust depending on goals.
Disclaimer plan. Everything passes to the survivor by default; within a fixed period, the survivor may disclaim some assets into a bypass trust if that proves advantageous (for tax or control reasons). This strikes a balance between flexibility and optional protection.
Even when estate tax is not front‑of‑mind, AB‑style planning can be valuable:
Blended families. A bypass trust can guarantee children from a prior relationship inherit later, while still providing for the survivor during life.
Creditor or remarriage concerns. Trust B can apply spendthrift protections and distribution standards that keep assets from being diverted.
Behavioral guardrails. Trustees must follow written standards (e.g., health/education/maintenance), reducing the risk of rapid depletion.
Goals: Is your priority appreciation control, blended‑family clarity, or simplicity?
Asset mix: Highly appreciated property? Real estate in multiple states? Closely held businesses?
Complexity tolerance: Comfortable with post‑death funding steps, recordkeeping, and potential separate tax filings for Trust B?
People: Do you trust the survivor (or a co‑trustee) to do the funding correctly? Do you have a reliable successor trustee for the bypass share?
If you value control and protection and don’t mind some administration after the first death, AB remains a strong design. If simplicity and basis flexibility dominate, consider a portability‑centric or disclaimer approach.
AB planning typically lives inside a couple’s revocable living trust. While both spouses are alive, assets are titled to the joint trust. At the first death, the document’s funding formula triggers. Each spouse should still sign a pour‑over will to catch stragglers and nominate guardians if needed. Funding before death (deeds, account retitling) is crucial so the trust actually owns what the formula intends to divide.
Present the certificate of trust to banks and brokers.
Work with appraisers and tax professionals to establish date‑of‑death values.
Sign internal allocation statements moving assets to Trust A and Trust B.
Maintain separate records and statements for each share.
Provide information reports or accountings to remainder beneficiaries where required.
Clear communication reduces conflict—especially in blended families where beneficiaries on both sides are watching.
Ignoring paperwork. Skipping the estate tax return for portability (when needed) or failing to document allocations undermines the plan.
Funding the “wrong” assets into Trust B. Highly appreciating assets belong in Trust B when estate‑tax exposure is real; when it isn’t, consider basis and liquidity.
No successor trustee depth. If the survivor is elderly or ill, an independent co‑trustee for the bypass share can keep administration on track.
Letting it go dark. Bypass trusts require ongoing attention—statements, prudent investment, and eventual distributions.
Choose AB (or disclaimer AB) if you want appreciation control, blended‑family protections, or creditor guardrails and are comfortable with administration.
Rely on portability if you want maximum simplicity and have low risk of estate tax; add a joint or separate revocable trust mainly for probate avoidance and incapacity planning.
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William is a personal finance journalist and writes on matters affecting people and their finances.
Author
William is a personal finance journalist and writes on matters affecting people and their finances.
