What it means
When one spouse dies, assets left outright to the survivor usually pass free of estate tax under a spousal exemption. The catch is that those assets then sit in the survivor's estate, and on the second death only one tax-free allowance may be available to shelter the combined total.
The A-B structure avoids that outcome by not leaving everything outright. On the first death, an amount equal to the deceased's remaining allowance is diverted into trust B, often called a bypass or credit shelter trust, from which the survivor can usually draw income without owning the capital.
Because the survivor does not own trust B, its assets are not counted in the second estate, and neither is any growth in their value. That last point is the quiet advantage: if the sheltered assets double before the second death, the whole increase escapes the second round of tax.
The trade-off is control and complexity. Trust B is irrevocable, so its terms are fixed at the first death, it needs its own tax filings, a trustee and separate records, and the survivor's access to capital is deliberately limited to preserve the tax treatment.
Portability has made these trusts less common in some jurisdictions. Where an unused allowance can simply be carried over to the surviving spouse, the arrangement may be unnecessary for tax alone, but families still use it for control, because it fixes who ultimately inherits, which matters greatly in second marriages and blended families.
In practice
Real-world examples.
Example
A couple with a $12,000,000 estate write mirror wills creating an A-B structure. When the husband dies, $6,000,000 moves into trust B, which pays his widow an income of roughly $240,000 a year at a 4% yield while the capital stays outside her estate.
Example
A business owner in a second marriage uses trust B to hold his shares in the family company. His widow receives the dividends for life, but the shares themselves pass to his children from his first marriage on her death, which an outright gift could never have guaranteed.
Example
An estate lawyer reviews an A-B trust drafted 20 years ago and finds that its funding clause would push the entire estate into trust B under today's higher allowance, leaving the survivor with nothing in trust A. The couple's wills are redrafted with a capped funding formula.
Formula
Calculation
Trust B funding = the lesser of the deceased spouse's remaining allowance and the value of their share of the estate, and Trust A funding = the deceased spouse's share of the estate - Trust B funding
The figures here are illustrative round numbers, not current legal limits. Assume a combined estate of $14,000,000, an allowance of $6,000,000 per person and an estate tax rate of 40%.
The estate is treated as half owned by each spouse, so the first spouse to die owns $14,000,000 / 2 = $7,000,000.
Trust B is funded with $6,000,000, the full allowance, and trust A receives the remaining $7,000,000 - $6,000,000 = $1,000,000.
The survivor's estate therefore contains their own $7,000,000 plus the $1,000,000 in trust A, a total of $8,000,000. On the second death the taxable estate is $8,000,000 - $6,000,000 = $2,000,000, and the tax at 40% is $800,000.
Without the split, all $14,000,000 would have passed to the survivor. With only one $6,000,000 allowance available, the taxable estate would be $14,000,000 - $6,000,000 = $8,000,000 and the tax would be $8,000,000 x 40% = $3,200,000. The A-B structure saves $3,200,000 - $800,000 = $2,400,000, which is exactly the sheltered $6,000,000 taxed at 40%.Case study
Seen in the real world.
The Halloway family is a fictional example used here to illustrate how an A-B trust works and where it can date badly. In this illustrative scenario the Halloways held a combined estate of $10,000,000, mostly a portfolio of let commercial units, and their wills created an A-B split assuming an allowance of $5,000,000 each and a tax rate of 40%.
When the first spouse died, $5,000,000 was placed in trust B and the survivor kept the remaining $5,000,000 outright. Over the next twelve years the trust B portfolio grew to $8,000,000, and none of that $3,000,000 of growth entered the survivor's estate. The survivor's own half also grew to $8,000,000, so on the second death the taxable estate was $8,000,000 - $5,000,000 = $3,000,000, taxed at 40% for $1,200,000.
Had everything been left outright on the first death, the survivor would have held $16,000,000 with a single $5,000,000 allowance, giving a taxable estate of $11,000,000 and tax of $4,400,000. The illustrative saving of $3,200,000 came from sheltering both the original $5,000,000 and the $3,000,000 of growth it produced.
Watch out
Common mistakes.
- Assuming the surviving spouse can spend trust B freely, when access is usually limited to income and specified needs in order to keep the assets out of the second estate.
- Leaving an old funding clause unreviewed after allowance limits change, which can accidentally fill one trust with everything and the other with nothing.
- Setting up the structure and then never retitling the assets, so accounts still held jointly pass straight to the survivor and bypass trust B entirely.
Questions
People also ask.
Is an A-B trust still needed where portability exists?
Often not for tax alone, but it remains useful for controlling who eventually inherits and for sheltering future growth from the second estate.
What is trust B usually called?
A bypass trust or credit shelter trust, because it bypasses the survivor's estate by using the first spouse's allowance.
Does trust B pay its own tax?
Yes, it is a separate taxable entity that files its own returns, and income distributed to the survivor is generally taxed to whoever receives it.
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