Parents care deeply about their children, saving up money for college and taking steps to leave behind an inheritance. Part of financial planning involves anticipating potential tax burdens. For example, a 20% tax on just $300,000 would be $60,000. Some married couples set up a survivor’s trust to avoid such exorbitant tax rates. What is a survivor's trust and what are the benefits?

What Is a Survivor’s Trust For?

A survivor’s trust is part of an estate planning arrangement for families called an A-B trust. The survivor’s trust — also known as an A trust — contains the surviving spouse’s property interests. There are two main reasons to establish this kind of trust fund: to ensure that your spouse has access to funds and property if you pass away and to minimize the impact of estate taxes on your joint assets for your children or other beneficiaries.

What Are the Parts of an A-B Trust?

It’s easier to understand how a survivor’s trust works when you have a clear picture of the related parts. Here are a few helpful terms to know.

Joint Trust

An A-B trust — or marital trust — is a type of joint trust. This means pooling your and your spouse’s assets instead of establishing separate trusts. All property is included: real estate, liquid capital, bank accounts, and investments.

Survivor’s Trust (A Trust)

If you are the surviving spouse, you receive full control of the assets in your portion of the trust. This becomes the A trust, or survivor’s trust. Depending on the terms you select, the survivor’s trust generally consists of:

• A fixed amount, such as $5.5 million or $10 million
• A percentage, e.g., 30% of your total marital assets
• The portion of marital wealth exceeding the decedent's estate tax exemption limit

A survivor’s trust is a revocable trust, meaning you have the freedom to use the funds however you wish. For example, you can modify inheritance arrangements, changing the amount you leave to specific children, family members, charities, or new beneficiaries.

Bypass Trust (B Trust)

The bypass trust consists of the portion of assets corresponding to the spouse who passes away. Depending on a married couple’s total net worth, this is often the maximum amount of the federal estate tax exemption.

This type of trust allows the property to “bypass” the surviving spouse, along with probate and taxes. The bypass trust remains for the couple’s children to inherit once both parents are deceased.

Of course, the surviving spouse can still use and receive income from assets in the bypass trust. This includes living in the family home, even if it’s part of the bypass trust.

How Does a Survivor’s Trust Work in Practice?

Marital trusts only go into effect after one of the spouses dies. To know what to expect during the process, consider a simple example of a survivor’s trust.

Imagine a married couple with a total of $19.5 million in assets. After the husband dies, the bypass trust receives $13,500,000 of the couple's assets, taking advantage of the full benefits of the husband's estate tax exemption.

This leaves $6,000,000 in property for the survivor’s trust. The wife has sole access to this trust.

After their mother passes away, how much will the adult children have to pay in estate taxes? Nothing at all. The $13,500,000 from the bypass trust is not taxed, and the $6,000,000 in the survivor’s trust is fully covered by the mother’s estate tax exemption.

Who Can Benefit From Creating a Survivor’s Trust?

A-B trusts aren’t as common as they used to be, but they can be valuable in specific circumstances.

High-Net-Worth Families

These days, you only need to worry about federal taxes on your estate if your combined marital assets total over $25 million. Before 2010, establishing trusts was a necessity for many middle-to-upper-income families, too. The estate tax exemption was only about $1 or $2 million, so many children faced potential estate taxes of up to 45% on wealth inherited from their parents.

This exemption increased significantly in 2010, and again with the Tax Cuts and Jobs Act of 2017. In 2024, children inheriting less than $13,610,000 from one parent or $27,220,000 from both wouldn’t need to worry about estate taxes.

State Laws for Inheritance Taxes

Not all states offer the same large exemptions for estate taxes as the federal government. Minnesota, New York, Oregon, and many others have estate taxes of up to 16% (20% in Washington). Iowa, New Jersey, Nebraska, Pennsylvania, and a few others apply inheritance taxes instead.

If you live in one of the 17 states with these taxes, setting up a marital trust may be the best option for your family. That way, your children can reduce a considerable tax burden or avoid it completely.

Estate Tax Exemption for the Surviving Spouse

According to the U.S. Federal Estate and Gift Tax Law, spouses can transfer assets to one another without tax liabilities at any time. This unlimited marital deduction also applies to assets inherited after death. If necessary to cover federal taxes on the size of the estate, the surviving spouse can also file an estate tax return using a portability allowance.

What Are the Pros and Cons of Using a Survivor’s Trust Arrangement?

Creating a survivor’s trust offers important advantages for modern couples, along with a few disadvantages.

Pros

A-B trusts are excellent tools for estate planning, especially for longtime couples who have children:

• Ensures the surviving spouse receives funds and property for life, showing loving care and concern
• Sets aside a sizeable trust for children that is safe from creditors
• Avoids probate and makes sure your assets go to the people you love the most
• Keeps your children’s inheritance protected, even if your spouse chooses to remarry
• Offers large tax advantages in states where the surviving spouse or children must pay estate tax

It’s true that federal estate tax laws have made the survivor’s trust less vital for tax purposes in the case of middle-class families, but being able to ensure assets remain protected for your children’s future is a strong incentive.

Cons

The process of establishing a survivor’s trust is relatively complex, requiring extensive decision-making and paperwork if you attempt it alone. For this reason, we strongly recommend that couples wondering what a survivor's trust is contact a friendly and patient attorney with significant experience in estate planning services.

It’s also important to keep in mind that the B trust is irrevocable; it isn’t changeable once it goes into effect. After one of the spouses passes away, the assets placed in the bypass trust no longer belong to the surviving spouse. This means that the surviving husband or wife doesn’t have the authority to sell included properties or disperse funds from the decedent’s bank account.

What Other Estate Planning Options Are Available?

A-B trusts and survivor’s trusts are a good fit for some families, but not all. Couples have a wide range of options for providing for loved ones and transferring wealth to children:

• Irrevocable life insurance trusts
• Special needs trusts
• Generation-skipping trusts
• Qualified terminable interest property trusts

Revocable trusts allow you to make changes at any time, which is useful as children grow, marry, or experience life situations. Irrevocable trusts protect against future modifications. The ideal option depends on your family's circumstances and local laws.

How Do You Create a Survivor's Trust?

To make sure your wishes are respected and your family is cared for, you need to know more than what a survivor's trust is. Taking the time to find trustworthy answers to your questions is critical. Always speak with an estate planning law firm to carefully analyze your family’s needs. At AmeriEstate, we have over 25 years of experience in personalized estate planning. Contact us for expert assistance right away.