While a standard living trust is designed for probate avoidance, specialized "Tax-Planning Trusts"—such as AB Trusts (also known as Bypass or Credit Shelter Trusts)—are used to minimize or eliminate federal and state estate taxes for larger estates.

The 2026 Tax Environment

As of 2026, the federal estate tax exemption stands at $15 million per person ($30 million for married couples). Any estate value above this threshold is generally taxed at a rate of 40%. For many families, "Portability" allows a surviving spouse to use the deceased spouse's unused exemption without a complex trust. However, the AB Trust remains a critical tool for specific situations.

Why Families Still Use AB Trusts

• State-Level Protection: Many states have estate tax exemptions far lower than the federal $15M limit and do not recognize "portability." An AB Trust can save hundreds of thousands in state taxes.
• Sheltering Appreciation: Assets placed in the "B" (Bypass) trust are "frozen" for tax purposes. Any future growth in the value of those assets passes to heirs completely tax-free.
• Control and Protection: An AB Trust prevents a surviving spouse from changing the ultimate beneficiaries, ensuring that children from a first marriage are not accidentally disinherited if the survivor remarries.

Potential Drawbacks

The primary downside to an AB Trust in 2026 is the loss of a "Step-Up in Basis" on the second spouse's death for assets held in the Bypass trust. This can lead to higher capital gains taxes for heirs if they sell the assets later. Additionally, these trusts require separate tax filings and ongoing administrative maintenance.

The Bottom Line: If your combined estate is over $15 million, or if you live in a state with its own estate tax, an AB Trust is a strategy worth discussing with a professional to weigh the tax savings against the administrative complexity.