Many Californians established AB trusts (also known as bypass trusts) to minimize estate taxes and protect assets for their heirs. However, changes in tax laws and shifting estate planning strategies have made these trusts less beneficial for many families. If you have an AB trust, you may be wondering: Is it still necessary? Should you replace it with a different type of trust? Let’s explore these questions.
What Is an AB Trust?
An AB trust is a type of estate planning trust designed to minimize federal estate taxes for married couples. When one spouse passes away, the trust is divided into two parts:
Trust A (Survivor’s Trust): Holds the surviving spouse’s share of the estate, allowing them full access and control.
Trust B (Bypass or Decedent’s Trust): Holds the deceased spouse’s assets, typically to be used for the benefit of the surviving spouse but ultimately passing to beneficiaries without being included in the survivor’s taxable estate.
This structure was highly effective when the federal estate tax exemption was much lower, ensuring that assets in Trust B bypassed further taxation upon the survivor’s death.
Why Your AB Trust May Be Obsolete
With significant changes in estate tax laws, the original reasons for setting up an AB trust may no longer apply to most families. Here’s why:
1. Higher Estate Tax Exemptions
The federal estate tax exemption has increased substantially (as of 2025, it stands at $13.99 million per individual or $27.98 million per married couple).
This means fewer estates are subject to federal estate tax, reducing the necessity for complex tax-saving structures like an AB trust.
2. Portability of Estate Tax Exemption
Since 2011, the IRS allows a surviving spouse to inherit their deceased spouse’s unused estate tax exemption through "portability."
This eliminates the need for a separate bypass trust to protect against estate tax.
3. Increased Capital Gains Tax Concerns
Assets held in a Bypass Trust do not receive a second step-up in basis when the surviving spouse dies.
This means heirs may face higher capital gains taxes when they sell inherited assets.
A simpler trust structure may allow for a full step-up in basis at the second spouse’s death, reducing capital gains taxes.
4. Administrative Burdens
An AB trust requires the surviving spouse to manage two separate trusts, file additional tax returns, and adhere to trust restrictions.
Many surviving spouses find this structure unnecessarily complex and burdensome.
Should You Replace Your AB Trust?
If your AB trust no longer provides a tax advantage or creates unnecessary complexity, it may be time to revise your estate plan. Here are some steps to consider:
1. Review Your Current Trust with an Estate Planning Attorney
An experienced California estate attorney can assess whether your trust still aligns with your financial and family goals.
2. Consider a Simpler Trust Structure
Many couples now opt for a revocable living trust that allows the surviving spouse full control over assets while still avoiding probate.
A properly drafted trust can maximize tax benefits and provide greater flexibility.
3. Assess Capital Gains Tax Implications
If your AB trust structure could result in higher capital gains taxes for heirs, transitioning to a single revocable trust may be a smarter option.
4. Update Beneficiary Provisions
If your estate planning goals have changed (e.g., remarriage, blended families, charitable giving), a revised trust can reflect your new wishes.
Final Thoughts
AB trusts were once a valuable tool for estate tax savings, but for many California families, they have become outdated. Given today’s higher estate tax exemptions and the availability of portability, a different trust structure may offer more benefits with less administrative burden. If you have an AB trust, it’s essential to review your estate plan and determine whether an update is needed.
Consult a California estate planning attorney to evaluate your current trust and explore options that better align with your financial and legacy goals. By staying proactive, you can ensure that your estate plan is optimized for both tax efficiency and ease of administration.
Contact the top-rated California trust and probate attorneys Moravec, Varga & Mooney today to schedule a telephonic consultation. Have questions, call (626) 460-1763 or email LV@MoravecsLaw.com.
Southern California Probate Lawyer Serving all counties in California, including Los Angeles, Riverside, San Bernardino, Sacramento, Santa Cruz & Beyond.
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