A/B provisions only apply to married individuals. When a revocable trust includes A/B provisions, until the death of one of the grantors occurs, there is only one trust. The trust splits into two sub-trusts at death: trust “A” and trust “B.”
Trust “A” is revocable and under the total control of the surviving spouse. Trust “B” is irrevocable and cannot be modified by the surviving spouse.
The large personal estate tax exemption currently in the IRS tax code means that most couples do not need A/B provisions for estate tax purposes. However, A/B provisions may still be useful if:
- You want to make sure your children receive your property. If you’re in a second marriage, you might want to arrange things so that your surviving spouse can use your property after your death, but that it goes to your children after your spouse’s death.
- You owe state estate tax. Some states impose their own estate taxes on property transferred at death. These taxes are in addition to the federal estate tax. So if you live in one of these states, depending on the state's exemption amount, you may owe state estate or death tax, even if no federal estate tax is due.
A/B provision trusts offer significant benefits, but they have drawbacks:
- Cost. When one spouse dies, the surviving spouse will need to hire a lawyer or accountant to determine how to best divide the couple’s assets between the irrevocable “B” trust and the surviving spouse’s revocable “A” trust. How the property is divided can have important income tax consequences.
- Trust tax returns. The surviving spouse must get a taxpayer ID number for the irrevocable “B” trust and file an annual trust income tax return.
- Recordkeeping. The surviving spouse must keep separate records for the irrevocable “B” trust property.
- Restrictions on the surviving spouse’s use of the property. The surviving spouse has only limited rights to use or access trust assets in the irrevocable “B” trust.