By: Amanda Miars
Estate plans are designed to stand the test of time—but they are not meant to remain unchanged forever. As tax laws and family circumstances shift, estate planning strategies must adapt accordingly. Nowhere is that more apparent than in the world of estate planning.
For many married couples, A/B trusts were once a cornerstone strategy for minimizing estate taxes. Today, however, changes in federal estate tax law have reshaped the landscape. What was once essential planning may now introduce unnecessary complexity—or even unintended tax consequences.
If your estate plan includes an A/B trust, it may be time to revisit whether it still serves your goals.
What Is an A/B Trust?
An A/B trust—also known as a credit shelter trust or bypass trust—is a structure typically built into a revocable trust for married couples.
At the death of the first spouse, the trust divides into two parts:
- Trust A (Survivor’s Trust): Remains under the surviving spouse’s control
- Trust B (Bypass Trust): Becomes irrevocable and holds assets up to the deceased spouse’s estate tax exemption
The key feature: assets in Trust B are generally not included in the surviving spouse’s taxable estate, even though the surviving spouse may benefit from them.
Why A/B Trusts Became So Important
To understand A/B trusts, it helps to look back at the tax environment in which they became popular.
Historically:
- Each spouse had an estate tax exemption
- That exemption was “use it or lose it”—it did not carry over to a surviving spouse
- Most assets passed to a spouse tax-free due to the marital deduction, deferring estate tax until the second death
Without planning, this meant one spouse’s exemption could be wasted entirely.
A/B trusts solved this problem by ensuring that:
- The deceased spouse’s exemption was fully used
- Assets placed in Trust B—and their future growth—escaped estate taxation at the second death
At a time when exemption amounts were much lower, this structure was not just helpful—it was often critical.
What Changed: A New Estate Tax Landscape
In recent years, the estate planning environment has shifted significantly, particularly as a result of changes in federal tax law. Estate tax law has evolved significantly.
Two developments have dramatically reduced the need for traditional A/B trust planning for many families:
1. Higher Estate Tax Exemptions
Federal exemption amounts have increased substantially over time, reaching historically high levels.
2. Portability
Introduced in 2011, portability allows a surviving spouse to use a deceased spouse’s unused estate tax exemption—simply by filing an estate tax return.
Together, these changes mean:
- Many married couples can now shield tens of millions of dollars from estate tax
- The original “use it or lose it” problem has largely been solved without requiring a bypass trust
In short, the world in which A/B trusts were a default solution has changed.
When Yesterday’s Strategy Meets Today’s Reality
While A/B trusts can still be valuable in certain cases, many older plans were drafted under very different assumptions.
As a result, what once protected wealth can now create new challenges.
1. Loss of Step-Up in Basis
One of the most important modern considerations is capital gains tax.
- Assets included in a person’s estate receive a step-up in basis at death
- Assets held in Trust B are typically excluded from the surviving spouse’s estate
That means:
- Trust A assets may receive a second step-up at the second death
- Trust B assets may not
For families with highly appreciated assets, this can lead to significantly higher capital gains taxes for heirs.
2. Added Complexity
After the first spouse passes:
- Trust B becomes irrevocable
- Separate tax filings and administration are required
- Distribution flexibility may be limited
- What was designed as a tax-saving tool can become an administrative burden for the surviving spouse and family.
3. Income Tax Considerations
Trusts are subject to compressed income tax brackets:
- Income retained in Trust B may be taxed at higher rates
- Flexibility in managing income and distributions may be reduced
- In today’s environment, income tax efficiency is often just as important as estate tax planning—sometimes more so.
When A/B Trusts Still Make Sense
Although the landscape has shifted, A/B trusts are far from obsolete.
They may still be appropriate if:
- Your estate may exceed current or future tax exemption levels
- You want asset protection from creditors or remarriage risks
- You have a blended family and want to control how assets pass
- You are planning around generation-skipping transfer (GST) taxes, which are not portable
In these situations, the benefits go beyond tax savings—they include control, protection, and intentional legacy planning.
QUESTIONS TO ASK YOUR PLANNING TEAM
As laws and financial priorities evolve, regularly reviewing your plan is an important part of good stewardship. Estate planning is no different.
If you have an existing plan, now is a good time to revisit it with your advisory team.
Consider asking:
Do We Have an A/B Trust Structure?
- Will our plan split into sub-trusts at the first death?
- How are assets allocated?
Are Estate Taxes Still a Concern?
- How does our net worth compare to today’s exemption levels?
- What assumptions were made when our plan was created?
Are We Using (or Planning to Use) Portability?
- Will an estate tax return be filed at the first death to preserve unused exemption?
What Are the Tax Tradeoffs Today?
- Will our structure allow for a full step-up in basis?
- Could we be creating unnecessary capital gains exposure?
Does the Plan Still Fit Our Family and Goals?
- Does it align with our current assets and priorities?
- Is the level of complexity still justified?
Should We Update or Simplify?
- Are there opportunities to modernize the structure?
- Would a different approach better balance flexibility and tax efficiency?
The Bottom Line
A/B trusts were created in response to a very real problem—and for many years, they worked exactly as intended.
But as the tax landscape has evolved, so too must the strategies we rely on. For some families, the A/B trust remains an important tool. For others, it may be a legacy feature that no longer serves its original purpose.
When it comes to estate planning, one truth holds steady: effective estate planning requires periodic review and a willingness to adapt as circumstances change.
DISCLOSURES:
This material is not financial advice or an offer to sell any product and is not a recommendation to buy or sell any particular security. Past performance is not indicative of future results. The opinions expressed are those of the Live Oak Private Wealth Management Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass.
Live Oak Private Wealth is a subsidiary of Live Oak Bank. Investment advisory services are offered through LOPW, LLC, an Independent Registered Investment Advisor. Registration does not imply a certain level of skill or training. More information about Live Oak Private Wealth, including our advisory services, fees, and objectives, can be found in our ADV Part 2A and/or Form CRS, which is available upon request.
This should not be construed as tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations.