Unlocking the Power of A-B Trusts: How They Work to Save You Taxes in 2025

Julia Kagan is a seasoned financial and consumer journalist with extensive expertise in personal finance, formerly a senior editor at Investopedia.

What Exactly Is an A-B Trust?

An A-B trust is a specialized joint trust designed by married couples to reduce estate taxes. Each spouse contributes assets and designates final beneficiaries beyond the surviving spouse. When one spouse passes away, the trust divides into two separate entities: Trust A (the survivor's trust) and Trust B (the decedent's or bypass trust). Although less common now due to increased estate tax exemptions, A-B trusts remain a valuable estate planning tool.

Key Insights

• A-B trusts are jointly created by married couples to manage assets and minimize taxes.
• Upon the death of one spouse, the trust splits into Trust A (survivor's) and Trust B (bypass/decendent's).
• This structure defers estate taxes until after the surviving spouse's death, optimizing tax benefits.
• The surviving spouse has controlled access to Trust B assets, including income rights if outlined in the trust.
• Due to high current estate tax exemptions indexed for inflation, A-B trusts are less frequently utilized.

How Does an A-B Trust Operate?

Estate taxes can significantly reduce inheritance. For instance, a couple with a $20 million estate could face substantial taxes after the second spouse dies, given the 2025 exemption threshold of $13.99 million per individual. Without planning, the taxable portion of $6.01 million could incur a 40% tax, costing heirs millions.

By establishing an A-B trust, when the first spouse dies, assets equal to the exemption amount are placed into the irrevocable bypass trust (Trust B), shielding them from estate taxes. The remainder goes into the survivor's trust (Trust A), over which the surviving spouse maintains control. Taxes on Trust A assets are deferred until the surviving spouse’s death.

Additionally, if the surviving spouse elects portability, unused exemption amounts from the first spouse transfer to them, potentially allowing the entire estate to pass tax-free — eliminating the need for an A-B trust in many cases.

Advantages of Using an A-B Trust

The surviving spouse controls Trust A assets fully, while Trust B assets are protected from estate taxes upon their death. The surviving spouse can still live in the family home and receive income from Trust B if the trust terms allow.

Trust B uses the deceased spouse’s exemption, ensuring those assets pass tax-free to beneficiaries. This structure prevents double taxation, as Trust B assets are excluded from the surviving spouse’s taxable estate.

Portability of the estate tax exemption between spouses further enhances tax efficiency, allowing unused exemptions to be combined.

Important Note

Trust B is excluded from the surviving spouse’s estate for tax purposes, effectively avoiding double taxation.

Who Benefits Most from an A-B Trust?

While once a staple in estate planning, A-B trusts are now primarily used by couples with estates exceeding $13.99 million individually or $27.98 million jointly in 2025. For most, the portability provision and high exemption limits reduce the necessity of these trusts.

Couples with substantial assets beyond these thresholds still find A-B trusts invaluable for tax minimization and asset protection.

Pros and Cons of A-B Trusts

Pros: Significant estate tax savings, asset protection, and portability benefits.
Cons: Complex setup, ongoing maintenance costs, and potential capital gains taxes after both spouses pass.

Why Are A-B Trusts Less Common Today?

Thanks to increased estate tax exemptions and portability options, fewer couples require A-B trusts. However, they remain relevant for high-net-worth individuals seeking to optimize estate plans.

Alternative Names for A-B Trusts

Also called bypass trusts or credit shelter trusts, their primary goal is to reduce estate taxes for married couples.

Final Thoughts

A-B trusts offer a strategic way to minimize estate taxes and protect assets, especially for estates exceeding current exemption limits. While less prevalent due to tax law changes, consulting with an estate planning advisor can help determine if an A-B trust fits your financial goals and ensures your legacy is preserved efficiently.

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