An A-B trust, also known as a marital trust and bypass trust, is a type of estate planning arrangement that aims to make the most efficient use of the estate tax exemption available to married couples. The A-B trust structure is commonly used in the United States, particularly for couples with significant assets.

Here’s how an A-B trust generally works:

1. **Creation of Trust:** The A-B trust is established by a married couple through their estate planning documents, typically within a revocable living trust. Upon the death of one spouse, the trust divides into two separate trusts—the Survivor’s (or Marital) Trust (A Trust) and the Bypass (or Family) Trust (B Trust).

2. **Survivor’s Trust (A Trust):**
– The Survivor’s Trust, also known as the A Trust, holds the assets that the surviving spouse is entitled to use or receive income from during their lifetime.
– Assets in the A Trust are included in the surviving spouse’s estate for estate tax purposes.

3. **Bypass Trust (B Trust):**
– The Bypass Trust, also known as the B Trust, holds the assets that are not needed by the surviving spouse for their lifetime needs.
– The B Trust typically bypasses the surviving spouse’s estate and passes directly to the designated beneficiaries (often the couple’s children or other heirs).
– The purpose of the Bypass Trust is to make use of the deceased spouse’s estate tax exemption. By sheltering a portion of the estate from taxation, it helps reduce the overall estate tax liability.

4. **Utilizing Estate Tax Exemptions:**
– Each individual has an estate tax exemption, which allows a certain amount of their estate to pass tax-free to heirs. As of my last knowledge update in January 2022, the specific exemption amounts can vary and are subject to change. The A-B trust structure aims to make full use of both spouses’ exemptions, potentially shielding a larger portion of the estate from taxes.

5. **Portability:** With the introduction of portability rules in the United States, which allow a surviving spouse to use the unused portion of their deceased spouse’s estate tax exemption, some couples may find that an A-B trust is not strictly necessary for estate tax planning. However, couples may still choose to use this structure for reasons beyond tax planning, such as providing for children from previous marriages or protecting assets.

It’s important to note that estate planning and tax laws can change, so individuals should consult with legal and financial professionals to ensure their plans align with current regulations and meet their specific needs.