What is an A/B Trust?
An A/B Trust is not a single document you sign today; rather, it is a structure that is triggered after the first person in a couple passes away. At that time, the couple's assets are divided into two separate entities:
The "A" Trust (Marital Trust): Designed for the benefit of the surviving spouse. It qualifies for the unlimited marital deduction, meaning assets moved here are not subject to estate tax at the first death.
The "B" Trust (Family Trust): Also known as a Bypass or Credit Shelter Trust. This trust "bypasses" the surviving spouse's taxable estate, utilizing the deceased spouse’s estate tax exemption.
The A/B/C Variation
If you and your spouse use a Joint Revocable Trust, your plan may technically follow an A/B/C structure. This includes a third component:
The "C" Trust (Survivor’s Trust): This holds the surviving spouse's separate property and their half of the community property. The survivor maintains full control over this trust.
How Assets Are Allocated
Your estate plan includes a "funding formula" that instructs your Executor or Trustee on how to split assets between these trusts. This allocation is typically based on:
Current federal and state estate tax exemptions.
The total value of the estate at the time of the first death.
The specific goals for spousal support versus inheritance for children.
Why Use This Structure?
Tax Efficiency: It allows a couple to use both of their individual estate tax exemptions, potentially shielding millions from taxes.
Asset Protection: Assets in the "B" (Family) Trust are generally protected from the surviving spouse’s future creditors or a new spouse in the event of remarriage.
Control: It ensures that even if the surviving spouse changes their own plan, the "B" Trust assets will eventually go to the original intended beneficiaries (like children).