One of the most common questions married couples ask when creating an estate plan is: What happens to our living trust when the first spouse dies? The answer depends on how the trust was designed.
In this video, estate planning attorney Justin M. Kennedy explains two common trust structures for married couples: the A Trust (single trust) structure and the AB Trust structure. While both options begin as a joint living trust during the spouses’ lifetimes, they function very differently after the death of the first spouse.
Justin discusses how each trust structure works, when an AB Trust may be beneficial for blended families and second marriages, and how modern estate tax laws have influenced trust planning strategies. He also explains why trust design is one of the most important decisions married couples make when creating a comprehensive estate plan.
Whether you are establishing a living trust, updating an existing trust, or seeking to better understand your estate planning options, this video provides valuable insight into what happens to trust assets after the first spouse’s death and how different trust structures can help accomplish your family’s goals.
Transcript:
Hello, I’m attorney Justin M. Kennedy, with Litherland, Kennedy & Associates, an estate planning and elder care law firm.
I want to talk with you today about trust structure, specifically how a married couple can structure their Trust.
Assuming the married couple like each other and want to create a joint trust, there are broadly speaking two ways to structure that joint Trust.
While both spouses are alive, it is one Trust. The difference is what happens at first death.
Option 1: We call this our A-only Trust, upon first death, the trust stays one Trust. The survivor can do whatever they want. The survivor can adjust for changes in the law or changes in beneficiary circumstances. This is for our clients who do not want to put restrictions on the surviving spouse.
The risk of this is that the survivor could completely change the trust leaving the assets to entirely new beneficiaries.
For our clients who think some restrictions on the surviving spouse may be beneficial, we have…
Option 2: Upon first death, that one joint trust splits into an A-Trust and a B-Trust. The survivor’s share of the joint assets and the survivor’s separate property go to the A-Trust and the deceased spouse’s share of the joint assets and the deceased spouse’s separate property go to the B-Trust.
To help you remember the difference, I have a dark mnemonic but I hope it will help you. The A-Trust is for the Above ground spouse and the B-trust is for the Below ground spouse.
The surviving spouse could still do whatever they want with their A-Trust, but the B-Trust becomes irrevocable (no changes allowed). We see this AB Trust commonly used in blended families or later in life marriages where a spouse may want to ensure that their share of the Trust assets continue on for their loved ones.
With Option 2 even though the Trust splits, the assets are still there to take care of the survivor for the rest of the survivor’s life. I like to think of it as having two wallets. The survivor could take the family out for dinner and pay for that meal from their A-Trust wallet or their B-Trust wallet.
There are many ways to structure an AB Trust. Historically we used a disclaimer AB or traditional ABC trust structure where the primary purpose was to allow for assets to grow estate tax free – this was incredibly important when we had a $1M federal estate tax exemption. Currently we have a $15M federal estate tax exemption and this allows for us to be much more strategic with tax planning. Accordingly, about a decade ago, our office switched to using a Clayton Trust structure which allows our office to utilize these additional tax planning strategies for the irrevocable part of the Trust. Unfortunately, I see many attorneys out in this community still using the inferior traditional ABC trust structure which greatly limits the tax planning strategies available at first death.
To learn more about the other choices that go into the design of a living trust estate plan, I recommend that you attend one of our office’s in person living trust seminars or watch our on demand presentation, you may find more information about these on our website, attorneyoffice.com
Thank you.
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