What is an A/B Trust?

Many of my prospective clients have heard the term “A/B Trust”, but they rarely know what it means, even when they have an A/B Trust themselves. (I’ve even had cases where people didn’t realize they had an A/B Trust in the first place.) Let me shed some light on what this is, and when it might be beneficial to have one.

An A/B Trust is a married couple’s trust that must be split into at least two separate trusts on the first spouse’s death. One trust will hold the assets of the deceased spouse – this is frequently called the Bypass Trust. The other trust will hold the assets of the surviving spouse – this is usually called the Survivor’s Trust. The Bypass Trust is completely irrevocable, meaning it cannot be changed or altered. The surviving spouse can still change the Survivor’s Trust, and it only becomes irrevocable on the surviving spouse’s death.

There are two main reasons why people have an A/B Trust. One reason, which used to be the most common, is to reduce the amount of estate taxes owed. When the estate is split into multiple trusts, the IRS looks at each trust individually when deciding whether and how much taxes are owed. For this reason, an A/B Trust usually allows for additional trusts to be created if two trusts will not be enough to eliminate the estate tax. There are a number of names given to these “extra” trusts, but all of them have some heavy restrictions on them in order to get the most favorable tax treatment from the IRS. (In essence, the harder it is for the surviving spouse to access or redirect the assets, the better the tax treatment from the IRS.) However, the estate tax threshold has risen dramatically over the last decade, making A/B Trusts unnecessary for most couples worth less than $10 million.

The second reason why people might want an A/B Trust is to preserve assets for children or other beneficiaries. This is particularly a concern with blended families, where a parent is worried that, if they died first, their spouse would change the trust to benefit the survivor’s children, or simply spend all the money before the deceased spouse’s children could inherit. (The most common concern is that the surviving spouse would remarry and the new spouse would convince them to do one or both of the above.) In such a case, the Bypass Trust would act as a hurdle, preventing the survivor from changing the deceased spouse’s beneficiaries and making it more difficult to spend money in the Bypass Trust generally.

So what are the downsides? For one thing, the inability to change the Bypass Trust can be a big drawback for couples not looking to reduce their tax bill or preserve assets for their children. The difficulty in accessing money in the Bypass or other trusts can also be frustrating for the surviving spouse  (even though in some cases that’s the point). Mostly though, it’s a big hassle for the surviving spouse to have to maintain separate bookkeeping records for each trust created, and most people don’t want to deal with that if they don’t have to.

If you would like to learn more about A/B Trusts, or find out if you currently have one, please feel free to email me at kaway@kawaylaw.com.

Kelly Way Attorney pic and bio Kelley Way was born and raised in Walnut Creek, California. She graduated from UC Davis with a B.A. in English, followed by a Juris Doctorate. Kelley is a member of the California Bar and an aspiring writer of young adult fantasy novels.