Diane and Jack meet with an estate planning attorney to update their estate planning documents. The attorney suggests that they execute revocable trusts that include A/B trust planning. Typically, these types of trusts operate to minimize estate taxes. Upon the first spouse’s death the credit shelter (B) trust is funded with the federal estate tax exemption amount (but not more than that amount) so that there is no estate tax at that time. If the estate value is greater than the exemption, the balance will fund the marital (A) trust. The A trust utilizes the marital deduction which again eliminates estate taxes at the first spouse’s death.

When comparing this strategy with keeping their plan as is, Jack and Diane should know that after the first death, the survivor may have to administer three separate trusts, a marital (A) trust, credit shelter (B) trust and the survivor’s own revocable trust. Additionally, the survivor’s access to assets in the credit shelter (B) trust will be limited by what is called an "ascertainable standard." This means that the survivor can receive principal distributions for his or her health, support, education and maintenance. This ensures that the credit shelter (B) will not be included in the survivor’s taxable estate.

For this strategy to work effectively, a few things will have to occur. Assets held in joint tenancy pass directly to the surviving joint tenant (spouse) and therefore cannot fund the credit shelter (B) trust and utilize the first deceased spouse’s exemption. So, Diane and Jack will need to split the ownership of many of their assets into their respective revocable trusts so that the first spouse’s exemption will not be wasted.

For example, if Diane and Jack own their residence in joint tenancy with rights of survivorship, ownership should be split so that each trust owns half of the residence. This would occur by executing a new deed. For other assets, the process may be simpler, such as transferring assets into separate brokerage accounts.

In addition to terminating joint tenancies, since Diane and Jack do not know who will die first, they will need to divide ownership of their assets between their two trusts so that each trust owns assets similar in value. No matter who dies first, the first deceased spouse’s credit shelter (B) trust will be funded efficiently.

If we assume that Jack has $10 million in his name and dies first, his revocable trust will split into two trusts, the marital (A) trust and the credit shelter (B) trust. If Diane were to die first, the same would happen to her revocable trust. An amount up to the federal estate tax exemption amount ($13.99 million in 2025) will fund the credit shelter (B) trust and the balance will fund the marital (A) trust. Since Jack’s assets are less than the $13.99 million exemption, the entire $10 million will fund the B trust. This results in no estate tax at Jack’s death and $3.99 million of Jack’s exemption will be available to Diane by electing portability on Jack’s estate tax return.

Let’s assume Diane survives Jack for ten years and the assets in both the credit shelter (B) trust and in Diane’s revocable trust double in value, so each has $20 million. A big benefit of the credit shelter (B) trust is that the trust and all its appreciation will not be subject to estate tax at Diane’s death and will go to their children estate tax-free. This compares favorably to alternatives such as sending all of Jack’s assets to the marital trust. If the marital (A) trust was funded, that trust’s value (i.e., all the couple’s assets) would be included in Diane’s estate. Another advantage of the credit shelter (B) trust is that since this trust was not created by Diane and she has limited access to the trust assets, it can protect those trust assets from Diane’s potential future creditors. If the assets stay in trust for their children’s’ lives, creditor protection will continue for them.

Let’s look at how this planning plays out. The estate tax exemption is estimated to be $10 million in 2035 and asset values are assumed to double from 2025 to 2035.