A/B Trust in New York: Credit Shelter Trust and Marital Trust Planning

An A/B trust plan splits a married couple's estate at the first death so that both spouses' New York exclusions are used. With no portability in New York, it remains the foundation of estate tax planning for married couples with more than $7,350,000.

Many married New Yorkers have been told that the A/B trust is obsolete. The federal exclusion is $15,000,000 per person and $30,000,000 per couple, it is permanent, and federal portability lets a surviving spouse pick up whatever the first spouse did not use. On the federal side, that advice is largely right. On the New York side, it is wrong. New York's exclusion is $7,350,000 in 2026, New York has no portability, and New York has a cliff that taxes the whole estate once it exceeds $7,717,500. A couple that leaves everything outright to the survivor throws away the first spouse's $7,350,000 exclusion and hands the survivor an estate that is very likely over the cliff.

This page explains what an A/B plan is, how the “B” credit shelter trust and the “A” marital trust are funded and administered, what the surviving spouse can and cannot do, the income tax trade-off that comes with the structure, and the ways we build flexibility into it. We also say who does not need one.

What an A/B trust plan is

An A/B plan is a will or revocable trust that divides the first spouse's estate into two parts at death. The “B” trust, also called a credit shelter trust or bypass trust, receives an amount equal to the exclusion the first spouse can use tax-free. The “A” trust, a marital trust usually drafted as a QTIP trust, receives the balance and qualifies for the unlimited marital deduction, so no tax is due on it at the first death.

The surviving spouse benefits from both trusts for life. The difference is what happens at the second death. The A trust is included in the survivor's estate and taxed then. The B trust is not; it “bypasses” the survivor's estate and passes to the children (or whomever the first spouse named) free of estate tax, including whatever growth occurred in the meantime.

Why it still matters in New York

Consider a couple in Westchester with $14,000,000 of combined assets, held roughly equally, and a simple “I love you” will that leaves everything to the survivor. Federally, nothing is owed at either death: $14,000,000 is below one spouse's $15,000,000 exclusion, and the survivor can elect portability on top of that. The New York result is very different.

The outright plan costs the children well over a million dollars of New York estate tax. The A/B plan, on these facts, costs them nothing. That is the entire argument for the structure, and the federal exclusion has nothing to do with it. For more on why portability does not rescue the outright plan, see portability: federal yes, New York no.

Funding the B trust: formula clauses and the federal-state disconnect

Wills do not put a dollar figure on the B trust, because the exclusion changes every year. They use a formula: “the largest amount that can pass free of estate tax.” The question is which estate tax the formula refers to, and in 2026 the answer matters enormously.

A formula keyed to the federal exclusion directs $15,000,000 into the B trust. In our $14,000,000 example, that is the entire estate. The B trust does not qualify for the marital deduction, so New York would tax everything above $7,350,000 at the first death, and because the estate is over the cliff, the tax would be computed on the whole $14,000,000. A will drafted years ago, when the federal and New York figures were close, can produce exactly this result today. We review these formula clauses in every older will that comes through our office.

There are two fixes. The first is to key the formula to the New York exclusion, so the B trust receives $7,350,000 and everything else passes to the A trust. The second, which preserves more flexibility, is a “Clayton” provision combined with the state-only QTIP election. The will directs the balance to a trust that qualifies for QTIP treatment, and whatever portion the executor does not elect to treat as QTIP passes instead to the B trust. New York allows a QTIP election on Form ET-706 even when no federal Form 706 is required. The executor can therefore look at the actual numbers nine months after death and set the B trust at exactly $7,350,000, with the rest electing QTIP for New York, while the federal exclusion is preserved in full through portability.

The A trust: marital and QTIP

To qualify for the marital deduction, the A trust must pay all of its income to the surviving spouse at least annually, and no one else may receive anything from it during the spouse's lifetime. Principal may be made available to the spouse as well. The executor makes the QTIP election on the estate tax return; without the election, the trust does not qualify.

The price of the deduction is that the QTIP trust is included in the survivor's estate at the second death (IRC § 2044). That is not a defect. It is what the structure is for: the tax is deferred, not avoided, and the first spouse still controls where the remainder goes. If the surviving spouse is not a United States citizen, the unlimited marital deduction is not available without special drafting, and we handle those plans differently.

What the surviving spouse can do with the B trust

The B trust is not a lockbox. Clients sometimes resist the plan because they imagine the survivor being cut off from half the family's money. In a properly drafted credit shelter trust the survivor typically has all of the following:

• All of the income. Interest, dividends and rent are paid to the spouse for life, or accumulated at the spouse's discretion if the family prefers.
• Principal for health, education, maintenance and support. This “ascertainable standard” lets the trustee, who can be the surviving spouse, invade principal for the spouse's needs without causing the trust to be taxed in the spouse's estate.
• A 5-and-5 power. The spouse may withdraw the greater of $5,000 or 5% of the trust each year for any reason, with no questions asked, without estate inclusion of the balance (IRC § 2041(b)(2)).
• The trustee's role. The surviving spouse can serve as sole trustee, provided distributions to himself or herself are limited to the ascertainable standard. Many clients name the spouse and an adult child together.
• A limited power of appointment. The spouse can be given the power to redirect the remainder among the couple's descendants, which keeps the plan adaptable to what the children need decades later.

The basis trade-off

Here is the cost of the structure. Assets in the B trust receive a stepped-up income tax basis at the first spouse's death (IRC § 1014), but they do not receive a second step-up at the survivor's death, because they are not in the survivor's estate. Assets in the A trust do get a second step-up, because § 2044 includes them in the survivor's estate. The same is true of anything the survivor owns outright.

This matters when the B trust holds an appreciating asset for a long time. If the survivor lives twenty years and the B trust's brokerage account doubles, the children inherit the account with the old basis and will owe capital gains tax when they sell: 20% federal plus the 3.8% net investment income tax, and up to 10.9% New York State plus 3.876% New York City, a combined rate of roughly 38.5% for a city resident. The New York estate tax the B trust avoided tops out at 16%.

The comparison is not as lopsided as those rates suggest. Estate tax is paid on the full value; capital gains tax is paid only on the gain, and only if and when the asset is sold. But the trade-off is real, and we manage it in three ways: we fund the B trust with the assets least likely to appreciate or most likely to be sold anyway; we give an independent trustee the power to distribute appreciated assets to the survivor before death so that they are included and stepped up; and we run the numbers rather than assuming. Our pages on stepped-up basis and tax basis go deeper.

Disclaimer-based flexibility

For couples who are close to the line and want the simplest possible documents, we sometimes draft a disclaimer plan. The will leaves everything to the survivor outright, but provides that anything the survivor disclaims passes to a credit shelter trust. Within nine months of the death, the survivor looks at the numbers and disclaims exactly enough to fill the B trust. If the estate turns out to be smaller than expected, the survivor disclaims nothing and takes everything outright.

The weaknesses are practical. The survivor must act within nine months and cannot have accepted the benefits of the disclaimed property in the meantime. The survivor cannot hold a power of appointment over the disclaimed assets. And grieving spouses do not always follow through. A disclaimer plan is a good fit for a couple who trust each other and are likely to be under $7,350,000 anyway; for a couple who are clearly over it, we build the B trust into the document.

Second marriages and blended families

An A/B plan is especially valuable when one or both spouses have children from a prior marriage. Both the B trust and the QTIP trust provide for the surviving spouse for life and then pass the remainder to the beneficiaries the first spouse chose, and the survivor cannot change that. Leaving everything outright means trusting the survivor, and the survivor's future spouse, to leave the money to your children. In those plans we usually name an independent trustee or a child of the first marriage to serve with the spouse, and we spell out the distribution standard precisely so that there is nothing to litigate.

Who does not need an A/B trust

• Couples comfortably under $7,350,000 combined. If the family's total, counting the house, retirement accounts and life insurance, is well below one New York exclusion and unlikely to grow past it, a simple plan is fine, though a disclaimer clause costs little and provides insurance.
• Couples whose wealth is almost entirely in retirement accounts. Funding a credit shelter trust with an IRA is possible but carries income tax cost and complexity; it is often better to use the exclusion with other assets and leave retirement accounts to the spouse.
• Couples well above $30,000,000. The A/B plan still works, but the main planning is lifetime transfers: SLATs, GRATs, family LLCs and dynasty trusts that use the federal exclusion while the spouses are alive.

Related Estate Tax Planning Topics

• Portability of the estate tax exemption – What the federal DSUE election does, how to make it, and why it does not help with New York.
• New York estate tax in 2026 – The $7,350,000 exclusion, the rate table and how the gross estate is computed.
• The New York estate tax cliff – Why an outright plan often lands the survivor's estate on the wrong side of $7,717,500.
• Tax basis: step-up and carryover – The income tax side of the B trust decision.
• Spousal lifetime access trust – The lifetime version of the credit shelter trust for couples who want to act now.

Review your plan with us

If you are married, live in New York, and your combined assets are anywhere near $7,350,000, your will should be built around the New York exclusion. If you already have an A/B plan drafted before the federal and New York exclusions diverged, the formula clause needs to be checked. We will review your documents, show you the New York result at both deaths, and fix what needs fixing. Call us at 212-233-1233 or email [email protected]. We serve clients throughout Manhattan, Brooklyn, Queens, the Bronx, Staten Island, Nassau, Suffolk and Westchester.