B trust (bypass / credit shelter)
At the first spouse's death, a formula funds this irrevocable sub-trust up to the available estate tax exclusion. Assets and their growth are meant to bypass the survivor's taxable estate at the second death. The survivor often receives income and HEMS principal access but does not own the trust outright.
| Facet | Detail |
|---|---|
| Also called | B trust, bypass trust, credit shelter trust, family trust, non-marital trust, exemption trust |
| A-B / A-B-C role | B in both A-B and A-B-C plans |
| When created | At first spouse's death (testamentary sub-trust of RLT or will) |
| Revocable | No — irrevocable once funded |
| Inter vivos / testamentary | Testamentary (springs from RLT/will formula) |
| Typical beneficiaries | Surviving spouse (income + limited principal); remainder to children/heirs |
| Primary purpose | Lock in first decedent's exclusion; shelter appreciation from second estate tax |
| Marital deduction | No — intentionally not marital property |
| Uses estate exclusion | Yes — funded to exclusion amount (federal and often IL) |
| In survivor's estate | No — if no general power of appointment (HEMS invasion only) |
| Basis step-up | Step-up at first death only; no second step-up at survivor's death |
| Income tax | Complex or simple trust — Form 1041; DNI may pass income to spouse via K-1 |
| Crummey powers | No |
| GST / dynasty | Remainder may be GST-exempt if exemption allocated |
| Spendthrift | Strong for remainder beneficiaries; spouse access limited to terms |
| See-through (IRA) | Generally avoid as IRA beneficiary — accelerates tax; prefer spouse or conduit |
| Key tradeoff | Tax savings and creditor shield vs survivor cannot freely spend principal; admin after first death |
See ab-abc-trust-plan.md.