An AB trust (also called a credit shelter trust or bypass trust) is an estate planning structure that captures both spouses' Illinois estate tax exemptions ($4 million each, $8 million combined). Without an AB trust, the first spouse's $4 million Illinois exemption is generally wasted, exposing the surviving spouse's estate to Illinois estate tax on amounts over $4 million. With an AB trust, properly drafted and funded, both exemptions are used, saving up to $400,000+ in Illinois estate tax for affected families.
Illinois has a $4 million estate tax exemption per person, but unlike the federal estate tax exemption ($13.99M in 2025), the Illinois exemption isn't 'portable' between spouses. Federal portability allows a surviving spouse to use the deceased spouse's unused exemption automatically; Illinois doesn't. Without specific trust planning, the first spouse's Illinois exemption simply disappears at their death, leaving only the surviving spouse's $4M exemption to protect the combined estate.
How an AB trust works: at the first spouse's death, the estate is divided into two trusts. The 'A' trust (marital trust or QTIP trust) receives assets that qualify for the unlimited marital deduction, these pass to the surviving spouse without estate tax but are includable in the survivor's eventual estate. The 'B' trust (credit shelter or bypass trust) receives up to $4 million using the deceased spouse's Illinois exemption. The B trust's assets are NOT includable in the surviving spouse's estate, even though the surviving spouse can typically receive income from the trust and limited principal access during their lifetime.
The savings can be substantial. Consider a Northern Suburbs couple with $7 million combined estate: a $1.5M home in Wilmette, $4M in retirement and investment accounts, $1M in life insurance, $500K in personal property and other assets. Without AB trust planning, the first spouse's $4M exemption is wasted, and the surviving spouse's $7M estate exceeds the $4M exemption by $3M, generating roughly $300,000 of Illinois estate tax. With proper AB trust planning, both $4M exemptions are used, the $7M passes free of Illinois estate tax, and heirs receive an additional $300,000.
Modern variants: 'disclaimer trusts' allow the surviving spouse to choose at the first death whether to fund the bypass trust, providing flexibility based on estate size and tax law at the time of first death. 'Clayton election' QTIP trusts allow even more flexibility post-death. For households whose total estate is uncertain (might be at the threshold, might be far above), these flexible structures avoid locking into a specific funding decision before knowing how much the surviving spouse will need.
Key facts
- Illinois estate tax exemption: $4 million per person (not portable between spouses)
- Federal estate tax exemption: $13.99 million per person in 2025 (portable between spouses)
- AB trust: divides estate into marital trust (A) and credit shelter trust (B) at first death
- Bypass trust assets NOT includable in surviving spouse's estate
- Without AB trust: deceased spouse's Illinois exemption is generally lost
- Disclaimer trust: allows surviving spouse to choose at first death whether to fund bypass trust
Do I need an AB trust if my estate is under $4 million?
Generally no, the AB trust's primary purpose is using both spouses' Illinois exemptions to protect estates above $4M. If your combined estate is comfortably below $4M, the surviving spouse's single $4M exemption is sufficient and AB trust planning adds complexity without tax benefit. However, AB trusts have non-tax purposes too: protecting bypass trust assets from creditors of the surviving spouse, ensuring inheritance for children of a prior marriage, preserving assets if the surviving spouse remarries, and providing professional management of inherited assets. For estates under $4M, these non-tax purposes drive the trust decision rather than tax savings.
What's the difference between a credit shelter trust and a QTIP trust?
A credit shelter trust (or bypass trust) is funded with assets up to the deceased spouse's estate tax exemption and is NOT includable in the surviving spouse's estate. A QTIP trust (qualified terminable interest property) qualifies for the unlimited marital deduction at the first death (no tax) but IS fully includable in the surviving spouse's estate. Both can be used in AB trust planning: the bypass trust uses the first spouse's exemption; the QTIP receives the remainder and defers tax until the second death. QTIPs are often used for second marriages because they ensure the surviving spouse receives income during their lifetime but the principal eventually passes to the deceased spouse's chosen heirs (typically children of the first marriage).
