AB Trusts – Do You Need to Get Rid of Yours?

Dear Mr. Market:

Normally we write you letters about the markets or the economy…but what’s all that worth if your assets are not protected or properly positioned for what you intended them to do? The following article is penned by a guest author and Long Beach estate planner, Curtis Kaiser. At the end of the article you’ll see his firm bio and a link to his company page. Enjoy!

Read more: AB Trusts – Do You Need to Get Rid of Yours?

Are you married? Has it been nearly a decade (or more) since you and your spouse updated your estate plan? If so, there’s a good chance your plan includes the classic “AB Trust” structure, which—prior to 2011—was the primary way for married couples to double the value of their federal estate tax exemptions. But in 2011, the concept of “portability” changed the estate planning landscape.

In simple terms, portability allows a surviving spouse to inherit any unused federal estate tax exemption from their deceased spouse, combining it with their own. Portability is now a permanent feature of federal estate tax law, but if your estate plan still includes AB Trust planning, it might now be doing more harm than good.

To illustrate how portability can simplify and enhance an estate plan, let’s look at Bill and Alice, who have been married for 40 years. If Bill dies in 2026 without using any of his ~$7.5 million estate tax exemption, Alice can file a portability election with the IRS—without needing a separate trust. This election allows her to add Bill’s ~$7.5 million exemption to her own, giving her a combined exemption of $15 million. Even better, all property passing outright to Alice from Bill’s estate will receive a full step-up in income tax basis to fair market value as of Bill’s date of death. When Alice later passes away, her beneficiaries will receive a second step-up in basis to the fair market value as of Alice’s date of death.

But what if Bill and Alice still have a typical 2008-era estate plan with AB Trusts, designed to use both spouses’ federal estate tax exemptions? If they neglected to update their plan and Bill dies inv2026, Alice would be stuck with an AB Trust designed with outdated planning priorities. These trusts would require an extra tax return each year without a corresponding benefit, and their heirs would miss out on the second step-up in income tax basis for assets held in the B Trust. Instead, heirs would inherit these assets with a basis as of Bill’s date of death. If Alice lives a long time, this could lead to a large income tax bill when heirs eventually sell these assets.

This kind of update works best if both spouses address it together while healthy. Many clients don’t realize there is a mandatory split of assets between the “A” (Survivor’s Trust) and “B” (Family or Bypass Trust) until a spouse passes away.

At that point, surviving spouses often bring the plan to our office, drafted by another attorney years ago, to review. In these situations, to avoid the negative impact of an outdated plan, we often seek beneficiary approval for a petition to the probate court to modify the trust and eliminate the trust split requirement.

Bill and Alice’s story highlights just one downside of an outdated estate plan. However, for some high-net-worth couples, AB Trust planning can still have a place in a well-updated estate plan. If you’re married and it’s been more than five years since you updated your estate plan, reach out to your estate planning attorney to review whether an AB Trust still serves your goals. It’s often possible to revise your existing plan to retain the best aspects of AB Trust planning while also taking advantage of additional basis step-up opportunities.

Curtis Kaiser, JD/MBA – Click here to view the Kaiser Law Group website.
Board Certified Specialist in Estate Planning, Trust & Probate Law
“Purposeful Planning for the Multi-Millionaire Next Door®”

Our firm focuses exclusively on estate planning and we do it in a way that to put it simply, is designed to take care of our clients’ families. We do this best through the Legacy Program we began offering in 2019. Our Legacy Program currently serves 120 client families on an ongoing basis. We prepare our clients’ plans and assets for their loved ones and prepare the loved ones for the assets. We do this by (1) reactively and proactively adjusting the client’s plan and assets over time to reflect changes in laws, assets and perspective and (2) facilitating communication and education about the plan and assets between our clients and their helpers and beneficiaries.