A/B Trusts: Why They May Be Outdated and Tax Inefficient

Many married couples who created estate plans years ago still have an A/B trust built into their documents.

At the time, that structure may have made sense. A/B trusts were commonly used to help married couples reduce or avoid federal estate tax when the exemption amount was much lower. Today, the tax landscape is different.

For 2026, the federal estate and gift tax exemption is $15,000,000 per person. Because of that higher exemption, many families no longer need an A/B trust for federal estate tax reasons.

Key Takeaways

• A/B trusts were often designed for a lower estate tax exemption.
• In 2026, the federal estate and gift tax exemption is $15,000,000 per person.
• Many married couples may no longer need a mandatory A/B trust for estate tax purposes.
• After the first spouse dies, the “B” trust typically becomes irrevocable and requires separate administration.
• Assets in the “B” trust generally will not receive a second basis adjustment when the surviving spouse dies, which will increase income taxes paid by your beneficiaries.
• Portability may help preserve a deceased spouse’s unused exemption, but it is not automatic.
• Older married-couple trusts should be reviewed to confirm they still fit the family’s needs.

What Is an A/B Trust?

An A/B trust is a trust structure commonly used in older estate plans for married couples. It may also be called a bypass trust, credit shelter trust, exemption trust, or family trust.

When the first spouse dies, an A/B trust divides into two parts.

 

The “A” trust usually remains the survivor’s trust. It is generally more flexible and continues for the benefit of the surviving spouse.

The “B” trust usually holds the deceased spouse’s share of the estate. This portion generally is irrevocable after the first spouse’s death.

Historically, this structure helped preserve the first spouse’s federal estate tax exemption. That was important when the exemption was much lower and before portability became a more common planning option.

Why Many A/B Trusts Are Outdated Today

With the 2026 federal estate and gift tax exemption at $15,000,000 per person, many California families are not expected to have a federal estate tax issue.

That does not mean estate planning is unnecessary. Avoiding probate, planning for incapacity, protecting beneficiaries, and making administration easier are still very important.

But it does mean that an older A/B trust may be creating a tax problem instead of solving a tax problem that no longer exists.

In some cases, portability may also help. Portability allows a surviving spouse to use a deceased spouse’s unused federal estate tax exemption. However, portability is not automatic. It requires the deceased spouse’s estate to file a timely federal estate tax return (Form 706) to make the election.

The Administrative Burden After the First Death

One of the biggest surprises with an A/B trust is what happens after the first spouse dies.

The surviving spouse will need to divide trust assets, obtain valuations, allocate property between the survivor’s trust and bypass trust, keep separate records, file additional income tax returns, and follow the terms of an irrevocable trust.

This can be a lot to manage during an already difficult time.

Many surviving spouses assume that because everything is in the trust, nothing needs to be done. With an A/B trust, the first death may trigger important legal, tax, and administrative steps.

Why the “B” Trust Can Be Tax Inefficient

Because estate / death taxes are no longer relevant for most Americans, income tax planning has become more important.  In general, assets included in a decedent’s estate receive an adjusted income tax basis at death. This can reduce capital gains tax if the assets are later sold by their beneficiaries since this income tax basis adjustment generally results in a step up in basis.

With an A/B trust, assets placed in the “B” trust after the first spouse dies generally will not receive another basis adjustment when the surviving spouse later dies. If those assets grow significantly in value, the beneficiaries may face more capital gains tax because these assets were held in a “B” trust.

There may also be income tax concerns. Some irrevocable trusts are taxed under compressed income tax brackets, meaning income retained in the trust can reach the highest federal income tax bracket much faster than income reported by an individual taxpayer.

For families without a federal estate tax concern, these income tax disadvantages may outweigh the original estate tax benefit.

Is an A/B Trust Ever Still Useful?

Yes. An A/B trust is not automatically wrong.

This structure may still be helpful for blended families, children from a prior marriage, asset protection concerns, or very large estates. It can also help control where assets go after the surviving spouse dies. If this is a concern for your family there are ways to provide that protection while preserving both tax treatment than which is  otherwise available with an outdated A/B trust.

The key is whether the structure is still intentional.

A trust that made sense 20 years ago may not be the best fit today.

When to Review Your Trust

You may want to review your estate plan if your trust uses terms such as:

• A Trust
• B Trust
• Bypass Trust
• Credit Shelter Trust
• Decedent’s Trust
• Exemption Trust
• Family Trust

 

A review is especially important if your trust was created many years ago, your assets have changed, your home or investments have appreciated, or you are unsure what happens after the first spouse dies.

The best time to review the plan is while both spouses are living and able to make changes. Once the first spouse dies, parts of the trust may become irrevocable, and the available options may become more limited.

Bottom Line for California Families

A/B trusts were once a common estate tax planning tool. But with the federal estate tax exemption at $15,000,000 per person in 2026, many families should ask whether that older structure still makes sense.

The right question is not simply, “Do we have a trust?”

The better question is, “Is our trust still appropriate for our current family dynamics, assets, and tax laws?”

We Can Help

At Pederson Law Offices, we help California families review older estate plans and determine whether their trust still fits their current circumstances.

If you have an older married-couple trust or are unsure whether your plan includes an A/B trust, we can help you understand what your documents say and what steps may be appropriate.

Please note: This blog post is for informational purposes only and does not constitute legal advice or create an attorney-client relationship. Consult with a qualified attorney at Pederson Law Offices for advice on your specific circumstances.