A-B and A-B-C plans
Educational overview; not legal or tax advice.
The problem these plans solve
A married couple may hold a combined estate worth more than one person's federal estate tax exclusion ($13.99M per person in 2025; scheduled to drop roughly in half after 2025 TCJA sunset unless extended). Without planning, the first spouse to die might leave everything outright to the survivor. The survivor's estate then contains all the assets but only one exclusion — wasting the first decedent's exclusion.
The A-B and A-B-C plans address this by splitting the estate at first death into two or three trusts, each serving a different purpose.
A-B plan (two trusts)
At the first spouse's death the estate is divided:
| Trust | Also called | Who benefits | Purpose |
|---|---|---|---|
| A trust (marital) | Survivor's trust, QTIP trust | Surviving spouse | Qualifies for marital deduction; no estate tax at first death. Included in survivor's estate at second death. |
| B trust (bypass) | Credit shelter trust, family trust | Surviving spouse and/or children | Funded up to the first decedent's unused exclusion. Passes estate-tax-free at first death and excluded from survivor's estate at second death. All post-funding appreciation also avoids estate tax. |
The B trust "bypasses" the survivor's estate. At the survivor's death only the A trust is included, and the survivor's own exclusion covers it (or the remaining portion).
A-B-C plan (three trusts)
Used when the estate is large enough that even with two trusts some assets might exceed the survivor's exclusion, or when more flexibility is needed (e.g., Illinois has a separate $4M exclusion at the state level):
| Trust | Also called | Contents |
|---|---|---|
| A trust (marital / survivor's) | Revocable surviving-spouse trust | Survivor's own half of community/marital property; fully controlled by survivor. |
| B trust (bypass / credit shelter) | Family trust | Funded to first decedent's exclusion; bypasses survivor's estate. |
| C trust (marital QTIP) | Marital deduction trust, QTIP trust | Excess above the B trust amount; qualifies for marital deduction via QTIP election on Form 706. Included in survivor's estate at second death but gets a step-up then. |
The C (QTIP) trust gives the first-to-die control over the ultimate remainder beneficiaries (typically children from a prior marriage or blended family) while still giving the survivor income for life.
Key mechanics
- Funding formula: trust instrument specifies a "formula clause" — often a pecuniary or fractional share formula — that allocates assets to each trust at funding.
- QTIP election: executor makes the election on Form 706 for the C (or A) trust. Election is irrevocable.
- Income rights: surviving spouse typically receives all income from the B and C trusts during life; principal distributions may be discretionary or limited by ascertainable standard (health, education, maintenance, support — HEMS).
- Invasion: HEMS standard keeps B trust out of survivor's estate (no general power of appointment).
- Step-up: B trust assets do not get a second step-up at survivor's death; A and C trust assets do. This matters for low-basis investments.
Illinois angle
Illinois has a separate $4M exclusion (Form 700). A-B-C planning can isolate the amount that escapes federal and Illinois estate tax (B trust), the amount that escapes federal but not Illinois unless funded correctly (C trust), and the survivor's portion (A trust). Coordination between federal and Illinois exclusions is a primary reason couples with $4M–$28M estates use the three-trust structure.
Portability vs. bypass trust
Portability (DSUE election on Form 706) is simpler and achieves a similar federal result, but the bypass trust has advantages portability cannot replicate:
- Appreciation inside B trust avoids estate tax at second death; portability preserves only the dollar amount.
- B trust assets have creditor protection.
- Portability does not apply to the Illinois exclusion; bypass trust does.
- DSUE can be lost if surviving spouse remarries and second spouse predeceases.
Sources
- glossary-and-trust-types.md
- strategies-overview.md
- illinois-estate-planner-prep.md
- i706-estate-tax-instructions-summary