What is an A/B Trust?
With an A/B Trust, after the first spouse dies the Living Trust is split into two parts, Trust A and Trust B. These two parts are sometimes referred to as the “survivor’s trust” and the “bypass trust.”
Trust B typically holds the assets of the decedent’s separate property and one-half of his or her community property. As an example, if the decedent had no separate property, but the couple’s community property was $1,500,000, Trust B would then contain $750,000. Trust B cannot contain more than the estate tax exemption (based upon the year of death). Since Trust B is subject to estate tax, as long as the amount placed in it is less than the exemption amount, no Federal estate tax is due. State taxes may be different than Federal taxes. Finally, although Trust B may possibly be used (with restrictions) by the surviving spouse, the trust itself must be irrevocable.
After Trust B is funded, any remaining assets are placed in Trust A. Since Trust A is considered a marital deduction trust for the benefit of the surviving spouse, any assets put there are tax exempt. Trust A is considered revocable, and thus the survivor is wholly in control of its assets. He or she may remove all of its assets or income and control the trust however he or she wishes, including changing any of the trust’s terms and assets.