An A-B trust is a trust which divides into Trust A and Trust B upon the death of the first settlor. The main tax advantage of an A-B trust is to utilize the unified credit upon the death of the first spouse in order that an estate of up to $3,000,000 may entirely escape estate tax by having $1,500,000 of the assets pass tax free on the first death and another $1,500,000 of the assets pass tax free on the death of the second spouse. The tax-free amount increases to $3,500,000 in 2009. However, after the repeal of estate taxes for those who die in 2010, the maximum amount passing free of tax will decrease to $1,000,000 for those who die in 2011.
"Trust A" or the "Survivor's Trust" remains revocable and contains the survivor's property interests, over which the surviving settlor has total control. If the survivor is the deceased settlor's spouse, this trust usually receives all assets that exceed the applicable exclusion, qualifying for the marital deduction and deferring any estate tax until the surviving settlor's death. If the survivor and the deceased settlor are not married, the deceased settlor's assets are usually not added to the survivor's trust since the transfer won't qualify for the marital deduction.
"Trust B", "Decedent's Trust", or "Exemption Trust", gives the survivor no rights or limited powers to use the assets allocated to it and is irrevocable. For a married couple, this trust contains the deceased settlor's assets, and the estate tax is calculated to the extent it exceeds the applicable exclusion. This trust is a type of bypass trust that can pass to the next generation of beneficiaries without triggering a transfer tax.
