Is Your AB Trust Outdated? Here's What You Need to Know

If you and your spouse created an estate plan before 2011, you may have an AB trust structure in place. While this was once a smart estate tax strategy, changes in tax laws have made AB trusts unnecessary—or even harmful—for many families.

Understanding whether your AB trust is still beneficial is critical to avoiding unnecessary tax burdens and ensuring your estate plan is optimized.

🔎 What Is an AB Trust & Why Was It Necessary?

An AB trust was a common estate planning tool used to:
✔ Minimize estate taxes for married couples
✔ Ensure proper distribution of assets after the first spouse's death

How It Works:

• When the first spouse dies, assets are split into two sub-trusts:
  • Trust A (Marital/QTIP Trust) – Holds assets for the surviving spouse and avoids estate taxes using the unlimited marital deduction.
  • Trust B (Bypass or Credit Shelter Trust) – Holds the deceased spouse's assets, using their estate tax exemption to shield assets from taxation.

🔹 Before 2011, this was the only way to ensure both spouses' estate tax exemptions were fully utilized.

🚨 Why AB Trusts May Be a Problem Today

In 2011, the IRS introduced portability, allowing a surviving spouse to inherit their deceased spouse's unused estate tax exemption. This change made AB trusts unnecessary for many couples.

Problems with an Outdated AB Trust:

❌ Tax Inefficiency – AB trusts don't allow a second step-up in basis, meaning beneficiaries may face huge capital gains taxes when selling inherited assets.
❌ Unnecessary Complexity – Managing two sub-trusts creates administrative burdens that may no longer be needed.
❌ Missed Estate Tax Benefits – Portability now allows couples to maximize exemptions without requiring a complicated trust structure.

💡 Example:
If Fred dies in 2025 and leaves his $13.99M estate tax exemption unused, his wife June can add Fred's exemption to her own—giving her a total exemption of $21.49M, even if the exclusion amount drops. This wouldn't be possible in an outdated AB trust.

✅ When Should You Keep an AB Trust?

Despite tax law changes, AB trusts can still be beneficial in certain situations:
✔ Blended families – Ensures assets are preserved for children from a previous marriage.
✔ Asset protection – Helps safeguard assets from remarriage, lawsuits, or creditors.
✔ State estate tax planning – Some states have lower estate tax exemptions where an AB trust may still help.

📢 Should You Update or Remove Your AB Trust?

If your estate plan is over 10 years old, you may need an update to:
✔ Maximize today's tax benefits (portability & basis adjustments)
✔ Simplify your trust structure
✔ Ensure your assets are passed on tax-efficiently

📞 Call us today to review your estate plan and determine if an AB trust is still right for you!