Is Your AB Trust Obsolete?

What’s inside the guide

• Why couples were advised to split their trust into an A share and a B share decades ago, and what tax problem that split was built to solve
• How the federal estate tax exemption has moved since then, and why that shift changes whether the split still does anything for your family
• What “losing the basis step-up” actually means for the B trust’s assets, and how it can turn into a real capital gains bill down the road
• The ways a mandatory split can box in a surviving spouse who needs flexibility over how the money is managed or spent
• How to tell, from your own trust document, whether the AB structure has gone obsolete
• What to do next if your trust needs to change

What is an AB trust?

An AB trust is a married couple’s trust that splits into two trusts the moment the first spouse dies. The survivor’s share, often called the A trust, stays revocable and under the survivor’s control. The deceased spouse’s share, the B trust, becomes irrevocable and locked to the terms set when both spouses were alive. This was a standard structure for California couples for decades, particularly those who signed their trusts in the 1990s or 2000s.

Why don’t most couples need an AB trust anymore?

The mandatory split was built to shelter assets from federal estate tax back when the exemption was small enough that an ordinary couple could exceed it. Under current law, a married couple can pass $15,000,000 per person, or $30,000,000 combined, free of federal estate tax (IRC §2010(c); P.L. 119-21 §70106). Portability rules also let a surviving spouse carry over the deceased spouse’s unused exemption, as long as the first spouse’s executor files the election (IRC §2010(c)). For nearly all families, the specific tax problem the AB split was designed to prevent no longer exists.

Can an AB trust actually cost my family money today?

It can. Inherited property generally receives a step-up in basis to fair market value at death (IRC §1014), and for community property, both halves of an asset get that step-up when the first spouse dies, not just the deceased spouse’s half (IRC §1014(b)(6)). Once assets move into an irrevocable B trust, though, they typically sit outside the surviving spouse’s estate, so they miss the second step-up that assets in the survivor’s own revocable trust would get. That gap is where an outdated AB split can quietly generate a larger capital gains bill when the property is finally sold.

If you are not sure whether your own trust still needs its AB split, a trust health check is the fastest way to find out.

The one thing

The mandatory A/B split that once saved estate tax now often creates cost and lost basis step-up with no offsetting benefit. The law changed after most of these trusts were written. If yours forces a split at the first death, it deserves a fresh read while both spouses are still here to fix it.

• 2 returns: a mandatory B trust becomes irrevocable and files its own tax return.
• No 2nd step-up: assets in the B trust generally get no basis step-up at the survivor’s death.
• Pre-2011: portability of a spouse’s federal exclusion did not yet exist.

Why these trusts existed

For decades, the federal estate tax exemption was low enough that ordinary California couples could blow past it, and there was no way to carry a deceased spouse’s unused exemption forward. So the standard fix was the A/B trust. At the first death, the trust split into two: a survivor’s share and a locked, irrevocable share that used up the first spouse’s exemption before it vanished.

It was smart planning for its time. The problem is that its time has largely passed, and the trusts didn’t get the memo. They’re still sitting in drawers, still holding a mandatory split, still ready to fire at the first death.

Portability and a higher exemption

Two things moved. First, federal law now lets a surviving spouse carry over the deceased spouse’s unused exclusion, so the exemption no longer has to be captured with a locked subtrust (26 U.S.C. §2010(c)(4)). Second, the federal exemption itself climbed to $15,000,000 per person, $30,000,000 for a married couple with portability, high enough that most families are nowhere near it.

Put those together and the original job of the B trust, using up an exemption before it was lost, is a job most couples no longer need done. Federal exemption figures are not my lane and they change, so treat every number here as something to confirm with your CPA before you rely on it.

What a mandatory B trust costs now

When the split fires, the B trust becomes irrevocable. That means it’s now a separate taxpayer with its own tax return every year, and trust income tax brackets compress fast, so income kept inside can be taxed hard (a CPA point, worth confirming).

The quieter cost is basis. Assets that go into the B trust at the first death generally do not get a second step-up when the survivor dies. Compare a plan where everything stays in the survivor’s own trust and gets a fresh basis at the second death, and the difference can be a large, avoidable capital gain for the kids.

And the survivor pays in freedom too. A B trust restricts access: the survivor is usually a beneficiary with rules, not an owner who can do as they please. For a lot of couples, that’s a constraint they never actually wanted.

Who still wants one

Forgive me for being blunt, because it’s my job: a B trust isn’t always a mistake. It’s just usually a tax tool being kept for a tax reason that’s gone. There are still good reasons to keep one, but they’re control reasons, not tax reasons.

Blended families often want it, so the first spouse to die can lock in where their share goes instead of leaving it to the survivor’s later choices. Estates that really are near the exemption may still need the shelter. And some couples want the creditor and remarriage protection a locked share can provide. If one of those is you, the structure may be doing real work. If none of them is you, it may just be doing damage.

1998 assumptions versus today

Read it, then fix it while you can

Start by having the trust actually read, not skimmed. The question is narrow: does it force a split at the first death, or does it give the survivor a choice? Those two designs lead to very different conversations.

While both spouses are alive, fixing it is straightforward. A modification or a restatement can soften a mandatory split into an optional one, or remove it, and keep the trust’s name and date so nothing has to be retitled (Prob. Code, §15402).

After the first spouse dies, the options narrow. There may still be a path through the courts to modify an irrevocable subtrust, but that’s court time and cost, not a quick fix (Prob. Code, §17200). The lesson is simple: this is a conversation to have now, together, not later, alone.

Four moves, in order

1. Find out if the split is mandatory. Have someone read the trust for one thing: does it force an A/B split at the first death, or leave it optional?
2. Run the tax picture with your CPA. Where you stand against the current federal exemption, and what a lost second step-up would cost your family, are CPA questions. Get the numbers.
3. Decide control versus tax. If a control reason applies, blended family, a near-exemption estate, creditor concerns, the structure may stay. If it’s purely the old tax reason, it probably goes.
4. Amend or restate while both are alive. Make the change now, together, keeping the trust’s name and date so funding survives untouched.

The clock you can’t see

While both spouses live, softening or removing a mandatory split is straightforward.

At the first death, the B trust becomes irrevocable and the easy fixes close.

After that, changing it means court time and cost, if it can be changed at all.

The cheapest version of this fix is the one you do this year.

About this guide

This is general information about California law, not legal advice, and reading it doesn’t make you a client. Federal estate tax and basis points, including every exemption figure, are federal tax territory and must be confirmed with your CPA.

Talk to us

Bring the trust and we’ll read it for the one thing that matters, then loop in your CPA on the tax picture so you decide with real numbers.

Ridley Law · 805-244-5291 · eric@ridleylawoffices.com · 567 W. Channel Islands Blvd. #210, Port Hueneme, CA 93041

The authority behind every claim

• 26 U.S.C. §2010(c)(4) (portability of a deceased spouse’s unused federal exclusion; confirm with your CPA)
• 26 U.S.C. §1014 (basis step-up at death; the second step-up the B trust often loses; confirm with your CPA)
• Prob. Code, §15402 (modifying a trust; a mandatory split can be softened or removed while both spouses are living)
• Prob. Code, §17200 (petitions concerning the internal affairs of a trust; the after-death route is court time and cost)
• Federal exemption figures adjust over time; confirm every figure with your CPA before relying on it

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