In the world of estate planning, AB trusts have long been a popular tool for married couples seeking to minimize estate taxes. However, recent tax law changes have brought about a significant shift in their relevance and effectiveness, leaving many couples wondering if AB trusts still hold value in their estate plans.

Understanding AB Trusts: A Traditional Approach to Estate Tax Reduction

A-B trusts were primarily designed to reduce estate taxes for married couples. Upon the passing of one spouse, the couple’s assets are divided into two separate trusts: Trust A and Trust B. Trust A, commonly known as the survivor’s trust, holds the assets of the surviving spouse, while Trust B, commonly known as the bypass or decedent’s trust, holds the assets of the deceased spouse.  Trust A is revocable and amendable during the surviving spouse’s lifetime, whereas Trust B is irrevocable.  The surviving spouse typically receives income from the assets of Trust B and can access the principal of Trust B in certain circumstances for their support and care.

The primary benefit of this structure lies in its ability to effectively double the estate tax exemption for married couples. Under federal estate tax law, each individual has a lifetime exemption, meaning that a married couple can double their exemption by utilizing A-B trusts.

The Changing Tax Landscape: Implications for AB Trusts

The American Taxpayer Relief Act of 2012 (ATRA) implemented substantial changes to the Tax Code with respect to estate taxes.  Primarily, the ATRA made “portability” of a deceased spouse’s unused estate tax exemption permanent if made in a timely election after the death of the first spouse to die.  Essentially, this allowed the surviving spouse to use the deceased spouse’s unused exempt amount for estate and gift tax purposes.    

A few years later, at the end of 2017, Congress passed the Tax Cut and Jobs Act (TCJA)  which introduced significant changes to federal estate and income tax laws. Notably, the TCJA essentially doubled the lifetime estate tax exemption, which in 2024, is $13.61 million, currently thought limit is $12.92 million per individual and $27.22 million per married couple.  As such, married couples can, in 2024, transfer up to $27.22 million in assets to their heirs during their lives or at death tax free. 

This substantial increase in the exemption threshold has rendered A-B trusts less effective and thus less appealing for many married couples as the most common reason for establishing an A-B trust was for estate tax savings.

AB Trusts: Still Relevant for Specific Scenarios

Despite the reduced appeal of A-B trusts considering recent tax law changes, they remain a valuable estate planning tool for certain couples. For those with assets exceeding the lifetime estate tax exemption, A-B trusts can still offer significant tax benefits. Additionally, couples seeking to protect their assets from creditors may find A-B trusts to be an effective solution.

Specific circumstances may also warrant the use of A-B trusts. For instance, if one spouse holds substantial assets prior to marriage or has children from a prior marriage or relationship, an A-B trust can ensure these assets are passed down to the children from the previous marriage rather than to the surviving spouse’s new spouse.

Adapting to the New Tax Reality: Reassessing and Modifying A-B Trusts

Given the evolving tax landscape, it is crucial for married couples to review their existing A-B trusts with an experienced estate planning attorney. This evaluation will determine whether the trust remains relevant to their current needs or if modifications are necessary.

In cases where the A-B trust still serves a purpose, the attorney can assist in making adjustments to minimize its tax impact. For example, modifying the trust terms may allow the surviving spouse greater access to the principal during their lifetime.

Conclusion: A-B Trusts in the Evolving Estate Planning Landscape

While AB trusts have traditionally been a popular estate planning tool for married couples, recent tax law changes have reduced their overall appeal. However, A-B trusts continue to hold significant value for specific scenarios and may offer tax benefits and asset protection for certain couples.

If you have an existing A-B trust, it is essential to consult with an estate planning attorney to assess its continued relevance and make necessary modifications. By proactively evaluating your A-B trust and considering the changing tax landscape, you can ensure your estate plan remains aligned with your current financial situation and long-term goals.