Attorney at Law

What Is an AB Trust?

An AB trust, also known as a bypass trust or credit shelter trust, is a type of trust that is utilized to circumvent limits on estate exemptions. AB trusts are particularly useful for individuals who have assets that are particularly valuable.

An AB trust is a joint trust that is owned by two spouses. When the first spouse dies, they put their assets into trust A that cannot be touched and is not taxable and trust B that passes to the surviving spouse. The surviving spouse oversees these trusts as well as the remainder of their spouses assets. Then, when the other spouse passes away, they leave both trust A and trust B, containing the remainder of their assets, to their beneficiaries. Through some legal maneuvering, the AB trust has increased the non taxable assets left to the beneficiaries.

The AB trust is designed to capitalize on the estate exemption. The estate exemption is the federally established limit for an individual seeking to pass on their assets. The estate exemption sets a maximum limit for the value of assets allowed to be passed on to a particular individual. In 2021, the lifetime estate exemption was $11,700,000.

Assets exceeding the estate tax limit will be taxed at the estate tax rate of 40%. While this does not affect the surviving spouse due to the unlimited spousal deduction, when the other spouse passes it has the potential to take a significant chunk out of the assets bequeathed to children of the spouses.

Key Takeaways

  • An AB trust is a joint trust between spouses that seeks to preserve as much of the estate of the deceased as possible free of taxation.
  • While AB trusts can be costly to set up, they are an excellent method of bypassing estate exemption for individuals with high-value assets.
  • The IRS requires very specific wording for AB trusts and has very specific limits on the benefits reaped by the surviving spouse.
  • If you are looking to establish an AB trust, an experienced trusts & estates attorney can improve the outcome of your case by utilizing experience and in-depth subject knowledge.

AB Trusts, Trusts, & Estates

When the first spouse dies, their portion of the couple’s property, at least up to the estate exclusion, is put into a trust for the beneficiaries. This trust is irrevocable, meaning the terms cannot be adjusted or revoked, and will pass to beneficiaries other than the surviving spouse. The rest of their assets will go into a trust that the surviving spouse gets direct control over. This allows the deceased spouse’s assets to pass completely untaxed and the surviving spouse still has their own estate exemption limits when they pass.

This limited control over the Beneficiaries’ trust is also not as harsh as it initially appears. The surviving spouse can still live in the couple's house and draw income from the trust in accordance with the terms stipulated in the AB trust contract.

When constructing an AB trust, couples must be careful about the terms and wording of the trust. The Internal Revenue Service (IRS) requires specific wording for AB trusts and places strict limits on the surviving spouse’s use of the trust intended for beneficiaries. To ensure that the surviving spouse gets the most out of the trusts while still maintaining AB trust exemption status, a trusts & estates attorney reviews the final contract before it is implemented. 

AB trusts may not be for everyone. Given the fees that can be involved in planning, managing, and establishing an AB trust, it can potentially be more expensive than the estate exemption.  Additionally, changes in tax law have made AB trusts less viable than they once were. It is important to consult with a trusts & estates attorney or other trusted expert on whether the value of the AB trust will outweigh the cost.

Bottom Line

If you are looking to establish an AB trust, you will need an experienced trusts & estates attorney. Due to the complex nature of the wording and limits placed on an AB trust, a trusts & estates attorney is a requirement.

By utilizing their experience, knowledge, and tax law expertise, a trusts & estates attorney can create an airtight AB trust for you in order to secure the maximum amount of assets for your beneficiaries.

Ask a Lawyer

Ask your own question and get advice from expert attorneys
Ask Question

Featured Elder Law Lawyers

Jamie L. Gingold, PC

23 years in practice
Bankruptcy, Elder Law
View Profile

Wells Law Firm, P.C.

16 years in practice
Adoption, Child Custody, Child Support, Divorce & Family Law, Divorce Law
View Profile

Law Office of David L. Scott

28 years in practice
Criminal Defense, Divorce & Family Law, Divorce Law, Elder Law
View Profile

Law Office of Tal Rubin, PC

22 years in practice
Auto Accidents, Personal Injury
View Profile

Paz Law

5 years in practice
Auto Accidents, Immigration Law, Personal Injury
View Profile

Law Offices of Denis Alexandroff, APC.

9 years in practice
Auto Accidents, Medical Malpractice, Premises Liability, Wrongful Death
View Profile


Are you looking for an attorney? Do you have questions about a legal case you are facing? Contact us now and we will put you in touch with a lawyer for free.
Attorney At Law is changing how clients connect with lawyers. By providing an innovative platform to lawyers who want to expand their practice’s reach, AAL is bringing law practices into the future.
6142 Innovation Way
Carlsbad, California 92009
Some of the content of this website may be considered attorney advertising under the rules of certain jurisdictions. The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship.
crossmenuchevron-upchevron-down linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram