Are A-B Trusts Obsolete? Understanding Modern Estate Tax Planning

Attorney Kellen Bryant explains how changes in estate tax law have affected A-B trust planning and when these structures are still essential for family protection.

If you have an older estate plan or are researching trust strategies, you may have heard conflicting information about A-B trusts (also called bypass trusts or marital trusts). Some advisors say they’re obsolete due to tax law changes, while others insist they’re still important. The truth is more nuanced—and understanding the current landscape can help you make better decisions for your family’s future.

Understanding A-B Trust Basics

Before examining whether A-B trusts are obsolete, it’s important to understand what they are and what they were designed to accomplish.

What Are A-B Trusts?

A-B trusts, also known as bypass trusts or marital/family trusts, are sophisticated estate planning structures that split into two separate trusts when the first spouse dies:

• “A” Trust (Survivor’s Trust) – Contains the surviving spouse’s assets and provides full control
• “B” Trust (Bypass/Family Trust) – Contains the deceased spouse’s assets with specific restrictions and beneficiaries

Historical Purpose: Estate Tax Preservation

Traditionally, A-B trusts served one primary purpose: preserving the estate tax exemption of both spouses. Before recent tax law changes, if you didn’t use sophisticated trust planning, you could lose one spouse’s estate tax exemption when they died, potentially costing families hundreds of thousands or millions in unnecessary taxes.

The Game-Changing Tax Law Revision

The landscape for A-B trust planning changed dramatically due to federal tax law modifications.

The Early 2010s Tax Code Change

In the early 2010s, there was a change in the tax code that made it so that A-B trust planning or bypass trust planning was no longer essential to preserving the estate tax exemption of both spouses.

The New “Portability” Rules

Under the updated law, the surviving spouse is able to make an election to also receive, in addition to his or her own exemption, the exemption of their deceased spouse.

This concept is called “portability” and it fundamentally changed estate tax planning:

• Automatic preservation – The deceased spouse’s exemption can be preserved without complex trusts
• Election-based system – The surviving spouse can choose to claim the deceased spouse’s unused exemption
• Simplified planning – Basic estate plans can now achieve what previously required sophisticated trust structures
• Retroactive correction – Poor planning can be fixed after the first spouse dies

The Legislative Intent

The change was intentional: it was the intention to not complicate estate tax planning when both spouses are alive.

Instead of requiring complex advance planning, the law now allows for post-death corrections. If the planning was left imperfect, it allowed the surviving spouse to make up for poor planning by the election of the surviving spouse upon death of the first spouse.

Why A-B Trusts Aren’t Totally Obsolete

Despite the tax law changes, A-B trusts haven’t disappeared entirely—and for good reason.

Beyond Estate Tax Planning

The A-B trusts are not totally obsolete because this law did not merely address the estate tax exemption. The tax law changes solved the estate tax problem but didn’t eliminate other important reasons for using these trust structures.

The Blended Family Protection Need

The most important modern use for A-B trusts addresses a completely different concern than estate taxes.

Where the A-B trust and the marital or bypass trust come into play is to avoid the accidental disinheritance of your blood children in favor of your surviving spouse who is not the parent of your blood children.

The Blended Family Disinheritance Risk

Consider this common scenario:

1. Second marriage situation – Both spouses have children from previous relationships
2. Simple planning – Husband leaves everything to wife, expecting she’ll eventually leave it to his children
3. Husband dies first – Wife inherits everything with no restrictions
4. Wife’s priorities change – She focuses on her own children and family
5. Husband’s children disinherited – When wife dies, everything goes to her children, not his

This scenario is “accidental disinheritance” because it wasn’t intentional, but the result is the same—the first spouse’s children receive nothing.

When A-B Trusts Should Still Be Considered

Modern estate planning should evaluate A-B trusts in specific family situations.

Blended Family Situations

A-B trusts should be considered when a married couple is performing their estate planning if they have:

• Children from previous relationships – Each spouse has children who aren’t related to the other spouse
• Significant age differences – One spouse is likely to survive much longer than the other
• Different family priorities – Spouses may have different ideas about ultimate beneficiaries
• Complex family dynamics – Tensions between spouses’ respective children
• Substantial assets – Enough wealth that disinheritance would be meaningful

How A-B Trusts Protect Blended Families

In blended family situations, A-B trusts provide crucial protection:

Guaranteed Inheritance Protection

• Locked-in beneficiaries – The deceased spouse’s children are guaranteed to inherit their parent’s share
• Survivor support – The surviving spouse can still benefit from the deceased spouse’s assets during their lifetime
• Clear distribution – No ambiguity about who gets what when both spouses are gone

Controlled Access

• Income distributions – Surviving spouse typically receives income from the bypass trust
• Limited principal access – Principal distributions usually restricted to specific needs (health, support, etc.)
• Trustee oversight – Independent trustee can ensure fair treatment of all beneficiaries

Other Modern Uses for A-B Trusts

Beyond blended family protection, A-B trusts can serve additional purposes in modern estate planning:

Asset Protection Benefits

• Creditor protection – Assets in the bypass trust may be protected from surviving spouse’s creditors
• Lawsuit protection – Structured properly, trusts can shield assets from legal claims
• Remarriage protection – Assets are protected if surviving spouse remarries and later divorces

Tax Planning Beyond Estate Taxes

• State tax benefits – Some states have different estate tax rules that favor trust planning
• Income tax optimization – Trusts can sometimes provide income tax advantages
• Generation-skipping benefits – Can help with planning for grandchildren and beyond

Control and Flexibility

• Professional management – Trustee can provide ongoing asset management
• Spending controls – Can prevent surviving spouse from dissipating assets
• Charitable planning integration – Can incorporate charitable giving strategies

Disadvantages of Modern A-B Trusts

While A-B trusts offer important benefits, they also have drawbacks that must be considered:

Complexity and Cost

• Administrative burden – Separate trust requires ongoing management and tax filings
• Professional fees – Trustee fees and professional management costs
• Complexity for surviving spouse – More complicated than outright inheritance

Tax Complications

• Income tax issues – Trust may not get stepped-up basis on appreciation
• Separate tax returns – Additional tax filing requirements
• Loss of simplicity – More complex tax planning required

Relationship Strain

• Family tensions – Can create conflict between surviving spouse and deceased spouse’s children
• Trustee challenges – Difficulty finding neutral trustees acceptable to all parties
• Reduced flexibility – Surviving spouse has less control over assets

Modern Alternatives to Consider

Today’s estate planning offers several alternatives to traditional A-B trusts:

QTIP Trusts

• Marital deduction benefits – Qualify for unlimited marital deduction
• Remainder control – First spouse controls ultimate beneficiaries
• Income to survivor – Surviving spouse receives all income

Disclaimer Planning

• Post-death flexibility – Decisions can be made after first spouse dies
• Simplified initial planning – Less complex documents required upfront
• Optimized outcomes – Can adapt to circumstances at time of death

Life Insurance Strategies

• Separate inheritance funds – Life insurance can provide inheritance for first spouse’s children
• Simplified structure – Avoids ongoing trust administration
• Guaranteed benefits – Provides certainty regardless of surviving spouse’s decisions

Making the Right Decision for Your Family

Whether A-B trusts make sense for your family depends on your specific circumstances:

Strong Candidates for A-B Trusts

• Blended families with significant assets – Primary use case in modern planning
• Concerns about surviving spouse’s judgment – Spending or remarriage concerns
• Multi-generational planning goals – Want to benefit grandchildren and beyond
• Asset protection needs – Protection from creditors or legal claims

Situations Where Simpler Planning May Work

• First marriages with shared children – Less risk of accidental disinheritance
• Smaller estates – Benefits may not justify complexity and cost
• High trust between spouses – Confidence that wishes will be honored
• Young couples – Circumstances may change significantly over time

Professional Guidance Is Essential

Given the complexity of modern estate tax law and family dynamics, professional guidance is crucial:

Key Considerations for Professional Planning

• Current tax law analysis – Understanding how current exemptions affect your situation
• Family dynamics assessment – Realistic evaluation of potential inheritance conflicts
• Cost-benefit analysis – Weighing benefits against complexity and ongoing costs
• Alternative strategy evaluation – Considering all available planning tools
• Regular plan updates – Ensuring strategies remain appropriate as laws and circumstances change

The Bottom Line

A-B trusts are not obsolete, but their primary purpose has shifted. While estate tax law changes have eliminated the need for A-B trusts in most pure tax-planning situations, they remain valuable—and sometimes essential—for protecting families in blended marriage situations and other complex circumstances.

The key is understanding that modern A-B trust planning is less about taxes and more about family protection. If you’re in a blended family situation with children from previous relationships, A-B trusts may be one of the most important tools for ensuring your children receive their intended inheritance.

However, these structures add complexity and cost, so they should only be used when the benefits clearly outweigh the drawbacks. Professional guidance can help you evaluate whether A-B trusts make sense for your specific family situation and goals.

For guidance on whether A-B trusts are appropriate for your estate planning situation, especially in blended family circumstances, consult with experienced estate planning attorneys who understand both the tax implications and family protection aspects of modern trust planning.