An ABC trust is a single revocable living trust that a married couple sets up during their lifetimes, written to split into three sub-trusts when the first spouse dies. The three pieces work together to use both spouses’ federal estate tax exemptions, control who ultimately inherits, and defer tax on anything above the exemption. In 2026, with a $15 million per-person federal exemption and a 40% rate on the excess, this structure remains useful for larger estates, blended families, and couples who want asset protection that portability cannot offer.
While both spouses are alive, the trust behaves like any ordinary revocable living trust. The couple controls everything, can change the terms, and reports trust income on their personal returns. The three-way split only happens at the first death, when the trustee divides assets according to a formula written into the original document.
What Each of the Three Sub-Trusts Does
Trust A: The Survivor’s Trust
Trust A holds the surviving spouse’s own separate property plus whatever portion of the marital estate isn’t allocated to Trust B or Trust C. The surviving spouse keeps full control, usually as trustee, with unrestricted power to withdraw principal and income. In practical terms, Trust A works like the original revocable trust did before the first death.
Assets flowing into Trust A qualify for the unlimited marital deduction, so no estate tax is owed on them at the first death.1eCFR. 26 CFR 20.2056(a)-1 – Marital Deduction in General Whatever remains in Trust A when the surviving spouse dies is included in their taxable estate and offset by their own $15 million exemption.
Trust B: The Bypass Trust
Trust B is where the estate tax savings actually happen. It receives assets equal to whatever remains of the deceased spouse’s federal exemption after any lifetime taxable gifts. Those assets, and any future growth on them, are permanently removed from the surviving spouse’s taxable estate and pass to the couple’s chosen beneficiaries free of estate tax at the second death.
The price of that tax benefit is restricted access. The surviving spouse can receive distributions from Trust B, but only for health, education, support, or maintenance. Federal tax law treats a power limited to that standard as something less than full ownership, which is what keeps the assets out of the surviving spouse’s estate.2Office of the Law Revision Counsel. 26 USC 2041 – Powers of Appointment Estate planners call this the HEMS standard. The surviving spouse can serve as trustee, but the distribution rules apply regardless. A trustee who gets too generous with principal risks having the IRS pull those assets back into the surviving spouse’s taxable estate.
Trust B also provides a layer of asset protection that portability cannot match. Because the trust is irrevocable after the first spouse’s death and typically includes a spendthrift clause, creditors of the surviving spouse generally cannot reach the assets. Child support and tax debts are among the exceptions, but garden-variety lawsuits and business liabilities usually stop at the trust wall.
Trust C: The QTIP Trust
Trust C, a qualified terminable interest property trust, comes into play when the deceased spouse’s estate exceeds their available exemption, or when the couple needs to control who ultimately inherits. It is especially common in blended families, where one spouse wants to provide for the survivor while guaranteeing the remaining assets eventually reach children from a prior marriage.
The QTIP election lets these assets qualify for the marital deduction, deferring estate tax until the surviving spouse’s death. The executor makes the election on Form 706, and once the filing deadline passes, the election is irrevocable.3eCFR. 26 CFR 20.2056(b)-7 – Election With Respect to Life Estate In exchange for the tax deferral, the surviving spouse must receive all of the trust’s income at least annually. Principal distributions are permitted but not required.
The defining feature of Trust C: the surviving spouse has no power to change who inherits the remaining principal after their death. The deceased spouse locked in those beneficiaries in the original trust document. At the surviving spouse’s death, the full value of Trust C assets is included in their taxable estate.4Office of the Law Revision Counsel. 26 USC 2044 – Certain Property for Which Marital Deduction Was Previously Allowed The tax bill lands on the trust, but the assets themselves flow to the beneficiaries the deceased spouse chose.
The Basis Step-Up Trade-Off
This is where many families get caught off guard. Assets placed into Trust B receive a stepped-up basis to their fair market value at the first spouse’s death.5eCFR. 26 CFR 1.1014-1 – Basis of Property Acquired From a Decedent But because Trust B assets are designed to stay out of the surviving spouse’s estate, they do not receive a second step-up when the surviving spouse eventually dies.
Say stocks in Trust B are worth $2 million at the first spouse’s death and grow to $5 million by the time the surviving spouse dies twenty years later. The beneficiaries inherit a $2 million basis and owe capital gains tax on the $3 million of growth when they sell. Had those same assets been in Trust A, they would have been included in the surviving spouse’s estate and received a fresh step-up to $5 million, wiping out the capital gain entirely.
The trade-off between estate tax savings and income tax cost is the central planning tension in 2026. When exemptions were lower, the estate tax savings from Trust B almost always outweighed the lost basis adjustment. With a $15 million per-person exemption, the math has shifted for many families. A couple with $20 million in assets might shelter enough through their combined exemptions alone, and the lost step-up becomes a real cost without a matching benefit. Some estate planners now build flexibility into trust documents that lets a portion of Trust B assets be pulled back into the surviving spouse’s estate specifically to trigger the basis adjustment.
Trust B and Trust C also become separate irrevocable entities that need their own tax IDs and annual returns.6Internal Revenue Service. 2025 Instructions for Form 1041 Trust income tax brackets are dramatically compressed compared to individual rates. In 2026, trusts hit the top federal income tax rate at just $16,250 of taxable income. For smaller estates, ongoing administration costs can erode the tax benefit substantially.
When an ABC Trust Still Makes Sense in 2026
The federal estate tax exemption climbed to $15 million per person in 2026 under the One Big Beautiful Bill Act, which made the higher exemption permanent and indexed it for inflation starting in 2027. A married couple can now shield $30 million from federal estate tax without any trust planning at all, simply by electing portability. So why still use an ABC trust?
Four situations continue to justify the structure:
- Estates exceeding roughly $30 million, where the QTIP piece defers tax on the excess and the bypass piece keeps every dollar of both exemptions working.
- Blended families. A surviving spouse who inherits outright can rewrite their will and disinherit the deceased spouse’s children. Trust C prevents that by fixing the remainder beneficiaries while still paying income to the survivor.
- Creditor and divorce protection. Assets in Trust B are generally beyond the reach of the surviving spouse’s future creditors, lawsuits, or a new spouse’s divorce claims. Portability offers none of that.
- State estate taxes. About a dozen states and the District of Columbia impose their own estate taxes, many with exemptions well below the federal level. An ABC trust funded at the state exemption amount can reduce or eliminate that state-level bill even when the federal exemption already covers everything.
Why Portability Is Not a Complete Substitute
Portability lets the surviving spouse claim the deceased spouse’s unused federal estate tax exemption, called the DSUE amount. The executor elects portability by filing Form 706, even when no tax is owed.7Internal Revenue Service. Frequently Asked Questions on Estate Taxes It is simpler and cheaper than establishing and maintaining an ABC trust, and for many couples it is all they need.
But portability has gaps. The generation-skipping transfer tax exemption is not portable.8Congress.gov. The Generation-Skipping Transfer Tax A couple who wants to leave assets directly to grandchildren can only use one spouse’s GST exemption through portability. Funding Trust B with GST-exempt assets preserves both exemptions for multigenerational transfers.
Remarriage creates another vulnerability. The DSUE amount a surviving spouse carries is based on the last deceased spouse. If the survivor remarries and the new spouse dies first with a smaller unused exemption, the DSUE from the first spouse is replaced and the original unused exemption vanishes. A funded bypass trust avoids this risk because the exemption was already used at the first death.
Portability also does nothing about growth. The DSUE amount is fixed at the unused exemption as of the first spouse’s death. If the surviving spouse’s assets appreciate significantly over the next fifteen or twenty years, that static number may not keep up. Assets in Trust B grow outside the surviving spouse’s estate no matter how much they appreciate.
The Disclaimer Trust as a Flexible Alternative
For couples who are not sure whether they will need the full ABC structure, a disclaimer trust offers a middle path. Instead of automatically splitting into sub-trusts at the first death, the surviving spouse has nine months to decide whether to disclaim a portion of the inheritance.9eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer Disclaimed assets flow into a bypass trust. Assets the surviving spouse keeps remain in a marital trust.
The appeal is flexibility. The surviving spouse can look at the size of the estate, current tax law, and their own financial needs before deciding how much to shelter. The downside is that this decision falls on a grieving spouse inside a narrow window, and the choice not to disclaim is itself irrevocable. Couples with assets clearly above the combined exemption threshold typically benefit more from the certainty of a mandatory ABC split. Couples closer to the line often prefer the optionality.