Tax-Saving Bypass (AB) Trusts

An AB or bypass trust is a complicated legal entity, used by wealthy couples to save on estate tax. By splitting the assets of the first spouse to die into two trusts (A and B), a large portion of the assets can bypass (hence the name) the estate tax entirely.

The important feature of an AB trust, for tax purposes, is that the surviving spouse never actually owns the property in the bypass trust (Trust B). He or she can, however, use the property and receive any income it generates. But when the surviving spouse dies, property in the bypass trust isn't subject to estate tax, as it would have been if the spouse had owned it outright. The tax savings can be substantial.