Do I Still Need an AB Trust?
What Is an AB Trust?
An AB trust—also called a bypass trust—used to be the go-to estate planning tool for married couples aiming to reduce federal and state estate taxes. When the first spouse dies, their assets are divided into two parts:
- A Trust: Holds assets for the surviving spouse and remains revocable (can be changed).
- B Trust (Bypass Trust): Holds the deceased spouse’s assets up to the estate tax exclusion amount. It is irrevocable (cannot be changed) and protects those assets from estate taxes when the surviving spouse dies.
The main goal was to minimize estate taxes by using both spouses’ exemptions separately. However, changes in tax law have affected the usefulness of AB trusts.
Why AB Trusts Are Losing Relevance
Since 2011, the federal estate tax system introduced portability. Portability lets the surviving spouse use any unused portion of the deceased spouse’s estate tax exclusion, effectively combining both exemptions.
Here’s what changed:
- The estate tax exemption rose dramatically—reaching $11.7 million per person in 2025, totaling $23.4 million for married couples.
- With portability, couples no longer need to split assets into complex AB trusts just to avoid federal estate taxes.
- This means fewer couples face federal estate tax liability, making AB trusts less necessary.
When You Might Still Need an AB Trust
Despite these changes, AB trusts may still be useful if:
- Your combined estate exceeds $23 million, making it likely you’ll owe estate taxes.
- You want to protect assets from creditors or prevent the surviving spouse from changing beneficiaries. This can be especially important in blended families or remarriage situations.
- You want to shield the growth (appreciation) of certain assets from estate taxes after the first spouse’s death.
Tax Implications of AB Trusts
An important downside to AB trusts is how they affect the step-up in basis for capital gains tax. Assets placed in the B trust get a step-up in basis when the first spouse dies, but not when the surviving spouse dies. This can increase capital gains taxes for heirs when they sell those assets later.
On the other hand, assets that pass outright to the surviving spouse do receive a second step-up in basis at their death, potentially reducing capital gains taxes significantly.
State Estate Tax Considerations
Federal estate tax isn’t the whole story. Some states have their own estate or inheritance taxes with:
- Lower exemption amounts
- No portability rules
- Different rules on trusts
If you live in a state with estate taxes, AB trusts might still offer valuable tax savings and asset protection.
What About the 2025 Estate Tax Exemption Change?
The current high estate tax exemptions are scheduled to expire on December 31, 2025. Without new legislation, exemption amounts will drop to roughly half or revert to earlier lower limits. This change could make AB trusts relevant again for many couples who want to protect their wealth from estate taxes.
Should You Keep Your AB Trust?
If your estate is well below exemption limits, and you don’t need asset protection features, simplifying your estate plan by removing an AB trust could reduce legal and administrative costs.
If your estate is large, complex, or you want to control asset distribution, keeping or updating your AB trust might still make sense.
- AB trusts are largely outdated for federal estate tax reasons due to portability and high exemptions.
- They still provide benefits for asset protection, controlling inheritance, and planning for state estate taxes.
- Consider how step-up in basis rules affect your heirs’ capital gains taxes.
- Plan ahead for the 2025 exemption changes that could revive the need for AB trusts.
- Consult an estate planning attorney to create a plan tailored to your assets, family, and state laws.
If you want to discuss your estate plan or review your AB trust, our experienced estate planning team at Naimish & Lewis can help. Contact us to schedule a consultation.
