A-B Trust: Definition, How It Works, and Tax Benefits

By Imperialpedia Staff

Estate planning documents and financial structuring

What Is an A-B Trust?

An A-B trust is a joint trust created by a married couple in order to minimize estate taxes. It is formed with each spouse placing assets in the trust and naming the final beneficiary—that is, anyone except the other spouse. The trust gets its name from the fact that it splits into two separate entities when one spouse dies. Trust A is the survivor's trust and trust B is the decedent's trust. A-B trusts have become less popular because the estate tax exemption covers most estates.

Understanding an A-B Trust

Estate taxes can take a sizable portion of a deceased person's assets. For example, consider a married couple who has an estate worth $20 million by the time one of the spouses dies. The surviving spouse is left with the whole $20 million, which is not taxed due to the unlimited marital deduction for assets flowing from a deceased spouse to a surviving spouse.

But then, the other spouse dies, leaving the money to their children. The taxable portion of the estate (the amount that exceeds the 2025 exemption threshold of $13.99 million will be $6.01 million). This means that $6.01 million will be taxed at 40% ($3.61 million), leaving $17.6 million ($13.99 million + $3.61 million) for the beneficiaries.

IMPORTANT

The decedent’s trust is not considered part of the surviving spouse's estate for purposes of the estate tax, so double taxation is avoided.

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