Marital Deduction Planning and A/B Trusts
Married couples have a set of estate tax tools that single people do not. Property left to a spouse is generally free of federal and state estate tax at the first death because of the marital deduction. The exemption of the spouse who dies first can be preserved for the family’s use at the second death through a credit shelter trust, or, for federal purposes, through an election called portability. Combining those tools is what practitioners call A/B trust planning, and for couples in New York and Connecticut it still does most of the work of keeping an estate under the state tax thresholds.
The planning is not automatic. A will that leaves everything to the surviving spouse uses the marital deduction and wastes the first spouse’s state exemption. A plan drafted in an earlier era of low exemptions can force assets into a trust that no longer serves a purpose and costs the family an income tax step-up in basis. The right design depends on the size of the estate, the state, the marriage, and how the couple wants the survivor and the children to be treated.
Milvidskiy Law Group P.C. drafts and updates marital deduction plans for couples, coordinating the estate tax analysis with income tax, the survivor’s needs, and the interests of children from prior marriages.
Key Takeaways:
- The marital deduction defers estate tax on property passing to a spouse until the survivor’s death. On its own it does nothing to reduce the tax; it only postpones it, and it can waste the first spouse’s exemption.
- A credit shelter trust, also called a bypass or B trust, uses the first spouse’s exemption by holding assets for the survivor’s benefit outside the survivor’s taxable estate. New York does not allow a surviving spouse to inherit an unused state exclusion, so this trust remains essential for New York couples near the state threshold.
- The trade-off is income tax. Assets in a credit shelter trust do not receive a new basis at the survivor’s death, so the plan should be flexible enough to decide at the first death whether to fund the trust or rely on portability.
The Marital Deduction
Property that passes to a surviving spouse who is a United States citizen, either outright or in a qualifying trust, is deducted in full in computing the federal estate tax and the New York and Connecticut estate taxes. The result is that a married couple can defer all estate tax until the second death, no matter how large the estate. The deduction is a deferral, not an exemption. Whatever the survivor still owns at death is taxed then, together with the survivor’s own property.
Two forms of trust qualify for the deduction while still letting the first spouse control what happens after the survivor dies. A general power of appointment trust gives the survivor income for life and the right to direct where the assets go. A qualified terminable interest property trust, or QTIP, gives the survivor all of the income for life but lets the first spouse decide who receives the remainder. The QTIP is the standard tool in a second marriage, where the goal is to provide for the spouse and then return the assets to the first spouse’s children. Our page on estate planning for blended families covers that use.
A spouse who is not a United States citizen does not qualify for the deduction unless the property passes to a qualified domestic trust, which has its own requirements and is covered on our cross-border estate planning page.
The Problem the Marital Deduction Creates
Each spouse has an exemption from estate tax. For 2026 the federal basic exclusion amount is $15,000,000 per person, according to the Internal Revenue Service; New York’s basic exclusion amount is $7,350,000 for deaths in 2026, according to the New York State Department of Taxation and Finance; and Connecticut’s exemption equals the federal amount under its statute. If the first spouse leaves everything to the survivor, the first spouse’s estate owes no tax because of the marital deduction, but the first spouse’s exemption goes unused. The survivor then dies owning both spouses’ property with only one exemption to shelter it.
Suppose a New York couple has $12 million between them. The first spouse leaves everything to the survivor: no tax, and the first spouse’s $7.35 million exclusion is wasted. The survivor dies with $12 million and one exclusion of $7.35 million. Because the estate exceeds the exclusion by more than five percent, New York’s cliff eliminates the exclusion and the entire $12 million is taxed. Had the first spouse’s share passed to a credit shelter trust instead, the survivor’s estate would have been roughly half that size and under the threshold. The figures are illustrative.
The A/B Trust Structure
The B trust: credit shelter or bypass trust
At the first death, an amount up to the available exemption is directed to a trust for the survivor rather than outright. The survivor can receive income and, under an ascertainable standard, principal for health, support, and maintenance, and can even serve as trustee within limits. Because the survivor does not own the trust, its assets and all of their appreciation are outside the survivor’s taxable estate at the second death. The trust has used, or “sheltered,” the first spouse’s exemption.
The A trust: the marital share
The balance of the first spouse’s estate passes to the survivor outright or in a marital trust that qualifies for the deduction. No tax is due at the first death. Whatever remains at the second death is taxed then, sheltered by the survivor’s own exemption.
Formula clauses
Because exemptions change every year, the division between the two shares is written as a formula that funds the B trust with the largest amount that can pass free of tax and sends the rest to the marital share. The formula must be drafted with the state exemption in mind: a clause keyed to the federal amount could send $15 million into a New York credit shelter trust and trigger New York tax at the first death on the excess over $7.35 million. State-specific formulas, or a separate state-only marital election where the state permits it, address that.
Portability, and Why New York Is Different
Federal law allows a surviving spouse to add the deceased spouse’s unused federal exclusion to their own, if a federal estate tax return is filed on time after the first death even when no tax is owed. For many couples under the federal threshold, portability plus an outright bequest to the survivor produces the same federal result as a credit shelter trust with less complexity and a better income tax outcome.
New York does not offer portability of its state exclusion. A New York couple who relies on portability alone preserves the federal exemption but loses the first spouse’s New York exclusion permanently. For a New York estate that will exceed $7.35 million at the second death, the credit shelter trust remains the tool that prevents the cliff. Connecticut does not offer portability either, though its higher exemption means fewer Connecticut couples are affected. New Jersey has no estate tax and no portability question.
The Income Tax Trade-Off
Assets left outright to a survivor, or held in a marital trust, are included in the survivor’s estate and receive a new income tax basis at the survivor’s death. Assets in a credit shelter trust are not included and do not step up; the children inherit them with the basis they had at the first death. For a couple whose estate will never approach any threshold, a mandatory credit shelter trust costs the children a step-up in basis and saves no tax. For a couple near the New York threshold, the estate tax saved usually exceeds the capital gains tax deferred.
Because the answer depends on values at the first death, modern plans build in flexibility. A disclaimer trust lets the survivor decide after the first death how much to disclaim into the credit shelter trust. A Clayton election lets the executor decide how much of the estate to treat as marital. Trust provisions that allow an independent trustee to grant the survivor a power that pulls trust assets back into the survivor’s estate for basis purposes, when the estate tax cost is nil, are another approach. The goal is to make the decision at the first death, with actual numbers, rather than years in advance.
Other Uses of the B Trust
Even where tax is not the reason, a credit shelter or QTIP trust does things an outright bequest cannot. It protects the assets if the survivor remarries, keeps them in the family line for children of the first marriage, provides management if the survivor becomes incapacitated, and shields the assets from the survivor’s creditors and from a later long-term care spend-down in some circumstances. Those benefits are why many couples keep a trust in the plan even when the estate is under every threshold.
Updating an Older Plan
Many wills drafted when exemptions were a fraction of today’s contain mandatory formula clauses that would now force most or all of the estate into a credit shelter trust. That can deprive the survivor of outright access, cost the children a basis step-up, and, in New York, create state tax at the first death. Couples who signed their documents more than a few years ago should have the formula reviewed or modified. Our wills and living trusts pages describe the documents these provisions live in, and our trust administration practice handles the funding of these trusts after a death.
When A/B Planning Is Not Needed
A couple whose combined estate, including life insurance and retirement accounts, will remain comfortably below the New York, Connecticut, and federal thresholds does not need a credit shelter trust for tax reasons, and a New Jersey couple has no state estate tax to plan around. For them, an outright plan with a portability election, or a trust chosen for protection and management rather than tax, is the better design. Our estate tax planning and tax planning pages describe the larger toolkit for couples who are above the thresholds.
What Our Service Includes
- A projection of federal, New York, and Connecticut estate tax at both deaths under the current plan and under alternative designs.
- Drafting wills or revocable trusts with the marital and credit shelter provisions, formula clauses tuned to the state, disclaimer and Clayton flexibility, and QTIP provisions where a second marriage calls for them.
- Qualified domestic trust provisions for non-citizen spouses.
- After the first death, the portability election, state-level elections where available, the disclaimer decision, and the funding and administration of the trusts.
- Review and restatement of older plans whose formula clauses no longer fit the exemptions.
Schedule a Consultation About Marital Deduction Planning
If you are married and your combined estate approaches the New York or Connecticut thresholds, or your documents were drafted years ago, the marital and credit shelter provisions deserve a fresh look. Our attorneys practice in New York, New Jersey, and Connecticut. Contact Milvidskiy Law Group P.C. to schedule a consultation.
This page is provided for general informational purposes only and does not constitute legal advice. Laws differ by state and change over time. Tax figures are as of the date stated and change annually. For advice about your situation, consult a qualified attorney.
Frequently Asked Questions
What is the marital deduction?
It is an unlimited deduction from the federal, New York, and Connecticut estate tax for property passing to a surviving spouse who is a United States citizen, either outright or in a qualifying marital trust. It defers estate tax until the survivor’s death rather than eliminating it, and on its own it can waste the first spouse’s exemption.
What is an A/B trust?
It is a plan that divides the first spouse’s estate into two shares at death. The B share, a credit shelter or bypass trust, holds an amount up to the available exemption for the survivor’s benefit outside the survivor’s taxable estate. The A share, the marital share, passes to the survivor outright or in a marital trust and qualifies for the marital deduction. Together they use both spouses’ exemptions.
What is a credit shelter trust?
A trust funded at the first spouse’s death with assets up to that spouse’s exemption. The surviving spouse can receive income and, under a defined standard, principal, but does not own the trust, so its assets and their growth are not taxed in the survivor’s estate. It is also called a bypass trust or a B trust.
What is a QTIP trust?
A qualified terminable interest property trust gives the surviving spouse all of the trust’s income for life and qualifies for the marital deduction, while allowing the first spouse to decide who receives the remainder at the survivor’s death. It is the usual tool in second marriages, where the goal is to provide for the spouse and then pass the assets to the first spouse’s children.
What is portability?
A federal election that lets a surviving spouse add the deceased spouse’s unused federal exclusion to their own. It requires a federal estate tax return filed on time after the first death, even if no tax is due. For 2026 the federal exclusion is $15,000,000 per person, so portability can give a survivor up to $30,000,000 of combined exclusion.
Does New York have portability?
No. New York does not allow a surviving spouse to use a deceased spouse’s unused New York exclusion, which is $7,350,000 for deaths in 2026. A New York couple who leaves everything to the survivor loses the first spouse’s state exclusion. A credit shelter trust at the first death is the way to preserve it, and it matters because New York’s cliff can tax the survivor’s entire estate once the exclusion is exceeded by a small margin.
Do assets in a credit shelter trust get a step-up in basis?
Not at the survivor’s death. Because the trust is outside the survivor’s estate, its assets keep the basis they had at the first death. Assets left outright or in a marital trust do step up at the survivor’s death. This is the main cost of the credit shelter trust, and it is why modern plans use disclaimer or election mechanisms to decide at the first death whether to fund it.
Our wills were drafted years ago with a formula clause. Should we update them?
Probably. Formula clauses written when exemptions were much lower can now force most of the estate into a credit shelter trust, limiting the survivor’s access, forfeiting a basis step-up, and in New York potentially creating state tax at the first death if the clause is keyed to the federal exemption. A review usually results in a more flexible design.
What if my spouse is not a U.S. citizen?
Property left to a non-citizen spouse does not qualify for the marital deduction unless it passes to a qualified domestic trust, which has a U.S. trustee and rules that ensure estate tax is collected when principal is distributed or the spouse dies. The plan should address citizenship status directly, including the possibility that the spouse becomes a citizen later.
Is A/B trust planning still necessary?
For couples under every threshold and in New Jersey, usually not for tax reasons, though a trust may still be wanted for protection, remarriage, or blended-family purposes. For couples in New York near or above $7,350,000, and in Connecticut or federally above $15,000,000, the credit shelter trust remains the primary tool for using both exemptions, because New York and Connecticut do not offer portability.
