For clients who are concerned about a potential estate tax liability, it can be important that they get full use of both of their lifetime estate and gift tax exemptions. The two most common ways to accomplish this are to make a portability election or to use a credit shelter trust.
Portability
Since 2010, Congress has allowed for the “portability” of any unused federal estate tax exemption from a deceased spouse to the surviving spouse. By filing an estate tax return, the surviving spouse can claim the deceased spouse’s unused exemption amount (DSUE), at the time of their death. The election must be made within nine months of the death or fifteen months with an extension. Relief for late filings is available in most cases for five years from the date of death.
While portability can be a good option in certain situations due to its simplicity and flexibility for the surviving spouse, it has limitations:
- The DSUE amount only applies to the “last such deceased spouse”, meaning that it can potentially be lost if the surviving spouse gets remarried.
- DSUE is not indexed for inflation.
- It does not apply to the Generation-Skipping Transfer Tax exemption, making it a weaker fit for multi-generational planning.
- Most states with a state-level estate tax do not offer a comparable portability option.
A/B Trust Structure
A popular alternative to the portability election is to have an estate plan with an A/B trust structure. With this strategy, when the first spouse dies, a marital trust or “A Trust” is created for the benefit of the surviving spouse for their life, and a credit shelter trust or “B Trust” (also referred to as a bypass or family trust), is created, typically for the benefit of the surviving spouse and descendants.
The credit shelter trust is generally funded with assets up to the amount of the deceased spouse’s unused estate tax exemption and all other assets go to the marital trust. No estate tax is owed because the transfer to the credit shelter trust is equal to or less than their estate tax exemption and the transfer to the marital trust qualifies for the unlimited marital estate tax deduction. The assets in the credit shelter trust are “frozen”, meaning that future appreciation will not be subject to estate or gift tax.
When the surviving spouse dies, the marital trust usually either remains in trust for their descendants or is distributed to them outright. The credit shelter trust can also either remain in trust or be distributed to the descendants, without additional estate or gift tax being owed.
The A/B Trust Structure in Action
To illustrate how an A/B Trust can be beneficial, we’ll use imaginary couple Tom and Susan as a simplified example.
- Tom and Susan have a joint revocable living trust with an A/B structure when the first spouse passes.
- Tom dies in 2026 when he has $20,000,000 of assets, all in the trust and $15,000,000 in estate tax exemption.
- $15,000,000 of his most appreciable property fund the credit shelter trust and the remaining $5,000,000 funds the marital trust, which both are for the benefit of Susan during her life, and for their descendants after she dies. No estate tax is owed.
- Over the next 20 years, the credit shelter assets grow to $45,000,000, the marital trust assets grow to $10,000,000, and Susan has $10,000,000 of her own assets. Susan’s estate tax exemption is now $20,000,000 with adjustment for inflation.
- Susan dies in 2046 and no estate tax is owed. This is because the credit shelter trust assets were “frozen”, trapping future appreciation and the remaining assets do not exceed Susan’s exemption.
Consider how this result would be different if the couple instead relied solely on portability:
- Tom’s $20,000,000 in assets pass to Susan, either outright or in trust. The entire transfer qualifies for the marital deduction, and no estate tax is owed.
- Susan makes a portability election and claims Tom’s $15,000,000 in estate tax exemption.
- Susan dies in 2046 with $65,000,000 in total assets and $35,000,000 in total remaining estate tax exemption.
- $30,000,000 is subject to estate tax, resulting in a $12,000,000 estate tax liability.
This is a very simplified example, but it demonstrates a situation where an A/B structure is clearly more advantageous than a portability election from a tax savings perspective.
Potential Drawbacks of Mandatory A/B Trusts
As a general matter, A/B trust structures are more complex in their administration and may restrict the surviving spouse’s access to the assets more than is desired. Assets held in credit shelter trusts can also have adverse income tax consequences, including subjecting income to less preferable tax rates for trusts and a lost step up in basis on the death of the surviving spouse. These drawbacks are usually worth it when compared to a hefty estate tax liability. However, with heavily increased estate tax exemptions and the introduction of portability, many families have a plan containing the drawbacks that come with an A/B Trust structure, but without the estate tax savings.
In just 2001, the individual estate tax exemption was $675,000 and the top estate tax rate was 55%. Those numbers, combined with the unavailability of portability, made A/B trusts a staple of trust-based plans for married couples, and these trusts would often mandate funding of the credit shelter trust up to the full exemption amount. With current exemptions of $15,000,000, many couples have plans that mandate funding the credit shelter trust up to the exemption amount and leave the marital trust entirely unfunded. This can result in unintended loss of control and tax consequences for people who may not have had an estate tax liability to begin with.
Modern estate plans solve this problem with mechanisms that provide flexibility. A disclaimer trust lets the surviving spouse decide, after the first death, how much to direct into the credit shelter trust. A Clayton QTIP trust achieves a similar result but puts that decision in the executor’s hands. In either case, the funding decision is made once the family knows the actual exemption amount, asset values, and circumstances, rather than being locked in years in advance.
Choosing the Option That is Right for Your Family
Every family’s exemption strategy looks different depending on assets, state of residence, and goals for the next generation. If you’d like to learn more information about portability options, such as an A/B trust, or a flexible funding structure like a disclaimer trust, schedule a conversation with a Bogart Wealth advisor. This article is intended for general educational purposes only and is not individualized legal or tax advice; estate tax rules and exemption amounts are set by current law and are subject to change.
Sources:
- Treas. Reg. § 20.2010-2, 26 C.F.R. § 20.2010-2 (2026).
- I.R.C. § 2010(c) (26 U.S.C. § 2010(c)).
- I.R.C. § 2010(c)(4)(B) (26 U.S.C. § 2010(c)(4)(B)).
- Treas. Reg. § 20.2010-2(a)(1).
- Rev. Proc. 2022-32, 2022-30 I.R.B. 101.
- Treas. Reg. § 301.9100-3.
- I.R.C. §§ 2001(c), 2010(c) (2000) (as in effect for decedents dying in 2001, providing a $675,000 applicable exclusion amount and a 55% top marginal estate tax rate).
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