An AB trust is a revocable living trust that married couples use to pass more wealth to their heirs by making sure both spouses’ federal estate tax exemptions get used. While both spouses are alive it behaves like any other living trust. When the first spouse dies, it splits into two: Trust A for the survivor, and Trust B, an irrevocable bypass trust that holds the deceased spouse’s share up to the federal estate tax exemption. For 2026, that exemption is $15 million per person, so a couple with a properly structured AB trust can shelter up to $30 million from federal estate tax.1Internal Revenue Service. What’s New – Estate and Gift Tax
With the exemption that high, most couples no longer need an AB trust for federal estate tax reasons alone. It still earns its complexity when creditor protection, control over who ultimately inherits, state estate taxes, or sheltering future appreciation matter.
How an AB Trust Works
During the couple’s joint lifetime, the trust is revocable. They control the assets, change the terms as they like, and use the property however they wish. The split only happens when the first spouse dies, and it happens automatically under the terms of the original document.2Legal Information Institute. AB Trust
Trust A, the survivor’s trust, holds the surviving spouse’s share of the couple’s assets. It stays revocable. The surviving spouse can spend from it, change it, or dissolve it entirely.
Trust B, the bypass trust (also called the credit shelter trust or exemption trust), receives the deceased spouse’s assets up to the federal estate tax exemption amount. It becomes irrevocable the moment the first spouse dies, locking in the beneficiaries the couple originally chose. Typically, assets up to the exemption flow into Trust B and anything above it goes into Trust A.2Legal Information Institute. AB Trust
The surviving spouse can receive the income Trust B generates and, in most AB trusts, request distributions of principal for health, education, maintenance, and support. Estate planners call this the HEMS standard. It covers medical bills, tuition, and reasonable living expenses, but not gifts to a new partner or speculative investments. That restriction is what keeps Trust B assets outside the surviving spouse’s taxable estate.
The Tax Problem an AB Trust Solves
Each spouse has their own federal estate tax exemption. For 2026 the basic exclusion amount is $15 million per individual, set by the One, Big, Beautiful Bill Act signed into law on July 4, 2025, with inflation adjustments beginning in 2027.3Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax
Without any planning, the first spouse’s death triggers no estate tax because the unlimited marital deduction covers everything left to the surviving spouse. But the first spouse’s exemption goes unused. When the surviving spouse later dies, the entire combined estate faces tax with only one exemption to shield it. An AB trust prevents that by moving assets into Trust B at the first death, where the first spouse’s exemption absorbs them. Up to $30 million then passes to heirs free of federal estate tax for couples who both die in 2026 or later.1Internal Revenue Service. What’s New – Estate and Gift Tax
AB Trust or Portability
Since 2011, federal law has offered portability. The executor of the first spouse’s estate files IRS Form 706 within nine months of death (a six-month extension is available), and the surviving spouse inherits whatever exemption the first spouse did not use.4Internal Revenue Service. Frequently Asked Questions on Estate Taxes For federal estate tax purposes alone, portability captures much of what an AB trust used to be the only way to achieve.
Portability does not do everything an AB trust does, though. Four differences tend to drive the choice.
- Creditor protection. Assets in Trust B are generally shielded from the surviving spouse’s creditors and lawsuits. With portability, the surviving spouse owns everything outright and gets no such protection.
- Beneficiary control. Trust B is irrevocable, so the first spouse’s chosen beneficiaries cannot be changed if the survivor remarries or has a change of heart. With portability, the surviving spouse can leave the combined estate to anyone.
- State estate taxes. Several states impose their own estate tax, and most do not recognize federal portability. State thresholds are often far lower than the federal exemption, sometimes starting around $1 million, so an AB trust may be the only way to use both spouses’ state-level exemptions.
- Growth sheltering. Any appreciation on Trust B assets stays outside the surviving spouse’s estate permanently. A ported exemption is a fixed dollar amount that does not grow with the assets.
For couples whose combined estate falls well below the federal exemption and who live in a state without its own estate tax, portability alone is often enough.
The Step-Up in Basis Trade-Off
This is the biggest drawback, and the one most people don’t see coming. When someone dies, their assets generally receive a step-up in basis to fair market value at the date of death, so heirs can sell inherited property without owing capital gains tax on the decedent’s lifetime appreciation.5Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
Property only receives a step-up if it is included in the decedent’s gross estate. Trust B assets are deliberately excluded from the surviving spouse’s estate. That is the entire point of the bypass. But it means Trust B assets receive a step-up at the first death and no second step-up at the second death. Appreciation between the two deaths carries forward to the beneficiaries, who owe capital gains tax when they sell.5Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
For estates well below the federal exemption, this trade-off can cost the family more in capital gains taxes than it saves in estate taxes. The math is worth running with an estate planning attorney before locking in the structure.
Ongoing Costs After the First Death
Once Trust B becomes irrevocable, it is a separate taxpayer, and that creates two obligations the trustee has to manage.
Trusts hit the top federal income tax bracket far faster than individuals. For 2026, a trust reaches the 37% bracket at just $16,000 of taxable income. Any income Trust B earns and retains is taxed at these compressed rates. Distributing income to beneficiaries shifts the tax to their individual returns, where rates are usually more favorable, but only if the trust document authorizes the distributions.
Trust B must file IRS Form 1041 each year if it has $600 or more of gross income, or any taxable income at all.6Internal Revenue Service. 2025 Instructions for Form 1041 and Schedules A, B, G, J Most families hire an accountant for the return, which adds a recurring cost on top of whatever the trustee charges for administration. Trust A, still revocable, is treated as the surviving spouse’s own property for income tax purposes and does not file a separate return.
Setting One Up
Creating an AB trust means working with an estate planning attorney to draft the document, define how assets split between Trust A and Trust B at the first death, and specify the distribution terms for each. Both spouses typically sign together because the trust governs shared assets. Attorney fees run meaningfully higher than for a simple revocable trust because of the split provisions, tax language, and trustee instructions.
Signing the document is only half the job. The couple must fund the trust by retitling assets into the trust’s name, changing ownership on real estate deeds, bank accounts, and investment accounts. An unfunded trust is just a document. Assets that were never transferred may pass through probate and never reach the AB structure at all.
The trust should be reviewed whenever tax laws change or after major life events, such as the birth of a grandchild, a divorce in the family, or a significant change in net worth. When the first spouse dies, someone has to serve as trustee of Trust B. The surviving spouse can serve in many cases, but doing so while also being a beneficiary creates tension between fiduciary duties and personal interest, which is why many couples name a professional trustee or a trusted family member instead.