AB Trusts and Credit Shelter Planning

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If you and your spouse have worked hard to build something worth protecting, the last thing you want is a large chunk of it going to the IRS instead of your children. That is exactly the problem that AB trusts and credit shelter planning are designed to solve. At Slowik Estate Planning, our Atlanta, Georgia law firm helps married couples use these tools to protect their wealth and keep more of it in the family. This page explains how AB trusts work, why Georgia families should care about them, and what you need to know before setting one up.

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What Is an AB Trust and How Does It Work?

A credit shelter trust, also called an AB trust or a bypass trust, is a technique that allows married couples to avoid estate taxes on transfers of wealth to third parties up to a certain amount. The name “AB trust” comes from the way the trust splits into two parts after the first spouse passes away.

When the first spouse dies, the trust is divided into two parts: the A Trust and the B Trust. The A Trust, also known as the Survivor’s Trust, holds assets for the benefit of the surviving spouse. The B Trust, also known as the Decedent’s Trust, Credit Shelter Trust, Exemption Trust, or Bypass Trust, holds the deceased spouse’s half of the trust property, typically for the benefit of the surviving spouse.

When the first spouse dies, an amount equal to the applicable exclusion amount is transferred to the credit shelter trust tax-free, with the remainder of the decedent’s wealth going to the survivor. That latter transfer is also tax-free due to the unlimited marital deduction. Think of it this way: the B Trust “locks in” the first spouse’s exemption so it does not go to waste.

The surviving spouse can draw income from the trust and, in some cases, obtain access to limited amounts of principal for specific needs like health care or living expenses. When the surviving spouse passes away, the assets in the credit shelter trust are not included in his or her taxable estate, so they pass directly to the beneficiaries.

Under the Revised Georgia Trust Code of 2010 (O.C.G.A. Title 53, Chapter 12), Georgia law provides a strong legal framework for creating and administering these trusts. Article 2 of the code governs express trusts, which includes AB trusts, and sets out the basic requirements for creating a valid trust in Georgia. Article 11 governs trustee duties and powers, which matters a great deal when a trustee is managing the B Trust for the benefit of the surviving spouse and other trust beneficiaries. Working with a knowledgeable attorney helps you set these trusts up the right way from the start.

Georgia Estate Tax and the Federal Exemption in 2026

One of the first questions people ask is whether Georgia has its own estate tax. The answer is no. As of July 1, 2014, O.C.G.A. § 48-12-1 was added to read that on and after July 1, 2014, there shall be no estate taxes levied by the state and no estate tax returns shall be required by the state. That is good news for Georgia families. But it does not mean you are off the hook entirely.

Even though there is no state estate tax in Georgia, you may still owe money to the federal government. The federal estate tax exemption is $15 million in 2026, up from $13.99 million for 2025. This tax is portable for married couples, meaning that if the right legal steps are taken, a married couple’s estate will not have to pay a tax on up to $30 million when both spouses die. If an estate exceeds that amount, the top federal tax rate is 40%.

Under the One Big Beautiful Bill Act (OBBBA), the exemption will be $15 million per person starting January 1, 2026, indexed for inflation. That is a significant number, and some families may feel they do not need to worry. But consider this: your estate could grow substantially over the next 20 or 30 years. Real estate values rise. Businesses expand. Retirement accounts compound. What looks like a modest estate today could easily push past the exemption threshold by the time the second spouse passes.

Georgia has no gift tax. The federal gift tax has an exemption of $19,000 per recipient for 2026 and 2025. Gifts over that total to one person in a single year count against your 2026 lifetime exemption of $15 million. Coordinating gifting strategies with your AB trust plan is something the attorneys at Slowik Estate Planning, located in Atlanta, Georgia, can help you think through carefully.

Why Portability Alone May Not Be Enough

You may have heard about “portability” and wondered if it makes an AB trust unnecessary. Portability is a useful tool, but it has real limits that every married couple should understand before relying on it.

The estate of the second spouse to die is now permitted to use the federal estate tax exclusion that was not used in the first spouse’s estate by relying on portability. Portability only applies, however, if the estate of the first spouse timely files a federal estate tax return to elect to preserve or “port” the first spouse’s excess exclusion amount to the surviving spouse for his or her use. If no estate tax return is filed, then portability is not available for the surviving spouse.

That is a real risk. Families dealing with grief sometimes miss the filing deadline. And even when portability works perfectly, it still has weaknesses that an AB trust does not share. Portability would not take full advantage of the exemptions in many cases. Asset protection for the spouse and children and tax sheltering of appreciation on the first spouse’s assets can be lost by relying on portability.

Here is the key difference: unlike a portability election, a credit shelter trust also shelters the appreciation of assets by removing the assets out of the surviving spouse’s estate. So if the B Trust holds assets worth $5 million when the first spouse dies, and those assets grow to $9 million by the time the second spouse dies, that entire $9 million passes to heirs free of estate tax. Portability would not give you that benefit.

Another benefit of a credit shelter trust is that it allows each spouse to specify how to distribute any assets remaining after the death of their spouse. This can be useful in the case of second marriages, as the first spouse can intentionally protect their children’s assets from any potential future spouses if the surviving spouse remarries. That kind of control is something no portability election can provide. If you have children from a prior relationship or simply want to ensure your assets reach your intended heirs, an AB trust is worth a serious conversation with Slowik Estate Planning.

The Step-Up in Basis Issue and What It Means for Your Trust

One important consideration with AB trust planning involves the tax basis of assets held in the B Trust. This is an area where careful drafting really matters, and it is one reason you should work with a qualified attorney rather than a generic online template.

Under federal law, assets that pass through a decedent’s estate generally receive a “step-up” in basis to their fair market value at the date of death. This can eliminate capital gains taxes on years of appreciation. However, the IRS addressed an important limitation in Rev. Rul. 2023-2, which clarified that assets in an irrevocable trust that are not included in the grantor’s gross estate do not receive this step-up in basis at death. Specifically, the ruling held that if a grantor funds an irrevocable trust with assets that are not included in the gross estate for federal estate tax purposes under Chapter 11 of the Internal Revenue Code, those assets are not adjusted to fair market value under Section 1014 at the grantor’s death.

What does this mean for your AB trust? It means the way your trust is structured and funded can have a real impact on the capital gains taxes your heirs eventually pay. Inherited property usually receives a step-up in tax basis. This adjustment resets the asset’s value to its fair market value at the time of death. When heirs sell the property, capital gains tax applies only to gains after that date. This rule often reduces or eliminates capital gains taxes on long-held assets. Getting the structure right requires attention to both estate tax and income tax planning at the same time.

The attorneys at Slowik Estate Planning understand how these rules interact. Proper trust administration also plays a role here, because a trustee who manages the B Trust assets correctly can help preserve tax benefits for beneficiaries over the long term. Under Article 16 of the Revised Georgia Trust Code (O.C.G.A. §§ 53-12-340 through 53-12-364), trustees are held to a prudent investor standard, which means they must manage trust investments with care and skill.

Setting Up an AB Trust in Atlanta: What the Process Looks Like

If you decide an AB trust makes sense for your family, the next question is: what does the process actually look like? Setting up an AB trust starts with a conversation, not a stack of paperwork. At Slowik Estate Planning in Atlanta, Georgia, we begin by getting a clear picture of your assets, your family situation, and your goals.

The legal foundation of an AB trust is typically a revocable living trust that both spouses create together. Once the first spouse dies, the trust becomes irrevocable, meaning the provisions for the trust can no longer be altered. That is why it is so important to get the terms right from the beginning. You will not be able to go back and fix a poorly drafted trust after the first spouse passes.

Under Article 2 of the Revised Georgia Trust Code (O.C.G.A. §§ 53-12-20 through 53-12-28), a valid express trust in Georgia requires a settlor with capacity, a clear intent to create a trust, identifiable trust property, and a lawful purpose. The trust must also have a definite beneficiary or fall within a recognized exception. Article 3 of the code (O.C.G.A. §§ 53-12-40 through 53-12-45) governs revocation and modification during the settlor’s lifetime, which is relevant because the revocable trust can be updated as your circumstances change.

Your AB trust will work alongside your other estate planning documents. Wills often include “pour-over” provisions that direct any assets not already in the trust to flow into it at death. Article 6 of the Revised Georgia Trust Code (O.C.G.A. §§ 53-12-100 through 53-12-120) specifically addresses testamentary additions to trusts, which is the legal mechanism that makes pour-over wills work in Georgia. Your full estate plan may also include powers of attorney, healthcare directives, and, if you have animals you love, pet guardianships to ensure they are cared for as well. Everything works together as a coordinated plan.

The estate tax lifetime exemption can change at any time. A credit shelter trust locks in the first spouse’s federal estate tax exemption at the time of their death. That kind of certainty is valuable, especially in a changing tax environment. To get started, contact Slowik Estate Planning in Atlanta, Georgia, for a consultation. We will help you build a plan that protects your family and reflects your wishes.

FAQs About AB Trusts and Credit Shelter Planning in Atlanta, Georgia

Does Georgia have its own estate tax that an AB trust can help avoid?

No, Georgia does not have a state estate tax. Under O.C.G.A. § 48-12-1, Georgia eliminated its state estate tax effective July 1, 2014. However, federal estate taxes still apply to estates above the federal exemption threshold, which is $15 million per individual in 2026. An AB trust helps married couples make full use of both spouses’ federal exemptions, potentially sheltering a combined $30 million from federal estate tax. Even without a state tax, federal planning is still very important for families with larger or growing estates.

What happens to the B Trust assets when the surviving spouse passes away?

When the surviving spouse dies, the assets remaining in the B Trust (the credit shelter trust) pass directly to the named beneficiaries, such as children or grandchildren, without being included in the surviving spouse’s taxable estate. This is the core tax benefit of the AB trust structure. Because the surviving spouse never had full ownership or control of those assets, they are not counted as part of his or her estate for federal estate tax purposes. Any appreciation in the B Trust assets over the years also passes to heirs free of estate tax, which can represent significant savings for growing estates.

Is an AB trust still useful now that portability exists?

Yes, an AB trust can still be a valuable planning tool even with portability available. Portability requires a timely estate tax return to be filed after the first spouse’s death, and if that deadline is missed, the unused exemption is lost. More importantly, portability does not shelter asset appreciation from the surviving spouse’s estate, while an AB trust does. An AB trust also provides asset protection for the surviving spouse and children, and allows the first spouse to control how assets are ultimately distributed, which is especially useful in blended family situations. Portability and AB trusts can sometimes work together as part of a broader strategy.

How does the Revised Georgia Trust Code affect my AB trust?

The Revised Georgia Trust Code, found in O.C.G.A. Title 53, Chapter 12, governs how trusts are created, administered, and managed in Georgia. For AB trusts, the most relevant provisions include Article 2 on express trusts, which sets out the requirements for creating a valid trust, and Article 11 on trustee duties, which governs how the trustee of the B Trust must manage assets for the benefit of the surviving spouse and other beneficiaries. Article 16 holds trustees to a prudent investor standard. Understanding these rules is important because a trustee who fails to follow them can be held liable for breach of trust under Article 14 of the code.

When should I contact Slowik Estate Planning about setting up an AB trust?

The best time to set up an AB trust is before you need it. Once the first spouse passes away, the options for restructuring your estate plan become much more limited. If you and your spouse have a combined estate that could grow beyond the federal exemption, have children from prior relationships, own a business, hold significant real estate, or simply want control over how your assets are distributed after both of you are gone, now is the right time to act. Slowik Estate Planning serves clients in Atlanta, Georgia, and can help you evaluate whether an AB trust fits your situation. Contact us today to schedule a consultation and get a plan in place.

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