AB TRUST
Back to GlossaryDefinition
A trust that divides into two upon the death of the first spouse. Formed with each spouse placing assets in the trust and naming the beneficiary any person except the other spouse. It splits into two upon the first spouse's death – trust A or the survivor's trust, and trust B or the decedent's trust.
Summary
An AB Trust, also called a bypass trust or credit shelter trust, is a tax planning strategy used by married couples to minimize estate taxes. When one spouse dies, the trust splits into two parts: Trust A (survivor's trust) holds the surviving spouse's assets, while Trust B (bypass trust) holds the deceased spouse's assets up to the federal estate tax exemption limit. This allows couples to effectively double their estate tax exemption and pass more wealth to heirs tax-free.
Usage Context
This term is crucial when studying estate planning strategies, tax minimization techniques for high-net-worth individuals, and understanding how married couples can preserve wealth for future generations while navigating federal estate tax laws.
Common Confusions
- Thinking the surviving spouse loses all control over Trust B assets
- Confusing AB Trusts with QTIP trusts
- Believing AB Trusts are always the best option for every married couple
- Not understanding that Trust B becomes irrevocable after the first death
- Assuming AB Trusts eliminate all estate taxes rather than just deferring them
