A/B/C Trusts and QTIP Trusts After the $15 Million Estate Tax Exemption

Last updated: September 27, 2026 · By the Flex Tax and Consulting Group team

An A/B/C trust is a type of estate plan for married couples. When the first spouse dies, it splits the couple’s assets into three trusts: the survivor’s own trust (A), a bypass or credit shelter trust (B), and a marital trust, usually a QTIP trust (C). Many of these trusts were written when the federal estate tax exemption was far lower than it is today. With the exemption now $15 million per person for 2026, and portability letting a surviving spouse use the unused amount, many families are finding that an older A/B/C structure can create income tax costs it was never meant to. Here’s how these trusts work and what to review.

How an A/B/C trust works

While both spouses are alive, the trust usually operates as a single revocable living trust. At the first death, the trust divides:

• Trust A (survivor’s trust): the surviving spouse’s share. It generally stays revocable, so the survivor can change it.
• Trust B (bypass or credit shelter trust): funded with the deceased spouse’s share up to the available estate tax exemption. It becomes irrevocable. The survivor often receives income and limited access to principal, and whatever remains passes to the named beneficiaries without being included in the survivor’s estate.
• Trust C (marital or QTIP trust): holds the rest of the deceased spouse’s share. It qualifies for the unlimited marital deduction if the executor makes a QTIP election on Form 706. The survivor must receive all income at least annually. At the survivor’s death, the remaining assets are included in the survivor’s estate but pass to the beneficiaries the first spouse chose.

The C trust is often used in blended families: it provides for the surviving spouse while making sure the first spouse’s children ultimately inherit.

What’s changed since these trusts were common

A much higher exemption

When many A/B/C trusts were drafted, the exemption was a few million dollars or less. For 2026 it’s $15 million per person. A formula that funds the B trust “up to the exemption” may now send most or all of the first spouse’s assets into the irrevocable bypass trust, which may not be what the couple intended.

Portability

Since 2011, a surviving spouse can use the deceased spouse’s unused exclusion (DSUE) amount if the executor elects portability on a timely filed Form 706. Estates that aren’t otherwise required to file can use a simplified method to elect portability up to five years after the death (Rev. Proc. 2022-32). Portability can achieve much of what a B trust was designed for, without locking assets away.

Basis step-up

This is often the biggest issue. Assets included in someone’s estate generally receive a new income tax basis equal to fair market value at death. Assets in a bypass trust are deliberately kept out of the survivor’s estate, so they usually don’t get a second step-up. If they’ve grown a lot, the beneficiaries may face capital gains tax that a different structure could have reduced. Assets in a QTIP trust are included in the survivor’s estate and generally do get a step-up.

Trust income tax filings

Once the B and C trusts become irrevocable, each is a separate taxpayer that generally files Form 1041 each year, and California Form 541 if it has California filing requirements. Trusts reach the top federal income tax bracket at a much lower income level than individuals, so how income is distributed matters. Income that is distributed is generally taxed to the beneficiary through a Schedule K-1.

Signs your trust should be reviewed

• It was signed before 2013, or hasn’t been reviewed since the 2025 tax law
• It uses a mandatory A/B/C split based on “the exemption amount”
• Your combined estate is below or near today’s exemption
• You hold highly appreciated assets, such as Bay Area real estate or long-held stock
• You have a blended family or specific wishes for children from a prior marriage
• A spouse has died and no Form 706 was filed

Changing the trust document itself is legal work for an estate planning attorney. We work alongside your attorney on the tax side: estate and trust returns, portability elections, basis records and the income tax effects of each option.

FAQ

What is the difference between an A/B trust and an A/B/C trust?

An A/B trust splits assets into a survivor’s trust and a bypass trust. An A/B/C trust adds a third, marital (usually QTIP) trust for the deceased spouse’s assets above the exemption, which defers estate tax until the survivor’s death while controlling who ultimately inherits.

What is the federal estate tax exemption for 2026?

$15,000,000 per person, under the 2025 tax law. Married couples can effectively shelter up to $30 million with proper planning, including portability.

Do assets in a bypass trust get a step-up in basis at the second death?

Generally no, because they aren’t included in the surviving spouse’s estate. Assets in a QTIP trust generally do.

Does California have an estate tax?

No. California does not currently impose a state estate or inheritance tax.

Related reading

• 2026 Year-End Tax Planning Checklist for High Earners, Business Owners & Investors
• Tax Consequences of Selling an LLC

Sources

Last reviewed September 27, 2026.

• IRS: What’s new, estate and gift tax
• IRS: About Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
• IRS: Rev. Proc. 2022-32 (simplified portability election), Internal Revenue Bulletin 2022-34
• 26 U.S.C. § 2056 (marital deduction and QTIP)
• 26 U.S.C. § 1014 (basis of property acquired from a decedent)

This article provides general information only and is not tax or legal advice. Tax outcomes depend on individual facts and circumstances. Contact us about your specific situation, and work with an estate planning attorney on any changes to trust documents.