A couple I worked with for years built a successful business in Manhattan. Their combined assets were north of $10 million. When the husband passed away unexpectedly, his will left everything outright to his wife. On the surface, this is simple and loving. But New York’s estate tax exemption is not “portable” between spouses. His entire $6.94 million state exemption was lost. When his wife passes, their children will face a significant—and entirely avoidable—New York estate tax bill on everything above her own exemption amount.
This is a common scenario I see in my practice. It stems from a misunderstanding of how married couples can structure their legacy. The choice often comes down to two primary vehicles: a Survivor’s Trust and an Exemption Trust. They serve very different purposes and reflect a couple’s priorities for stewardship, control, and tax efficiency.
The A/B Trust Structure: A Classic Approach to Legacy
A Survivor’s Trust and an Exemption Trust are not mutually exclusive. They are two parts of a common strategy known as an “A/B trust.” The goal is to use both spouses’ estate tax exemptions, sheltering more of the family’s assets for the next generation.
The mechanics are straightforward:
- When the first spouse dies, the couple’s joint living trust is divided.
- Assets up to the value of the deceased spouse’s available estate tax exemption are moved into the “B” Trust. This is the Exemption Trust, also known as a Bypass or Credit Shelter Trust.
- The remaining assets are allocated to the “A” Trust, which is the Survivor’s Trust.
This division is the critical step. From that moment, the two trusts operate under different rules and accomplish different goals. One prioritizes tax protection and asset preservation; the other offers flexibility and control to the surviving spouse.
The Survivor’s Trust: Control and Simplicity
The Survivor’s Trust (the “A” Trust) is the simpler of the two. It holds the surviving spouse’s share of the couple’s property and any assets that exceeded the deceased spouse’s exemption amount. For all practical purposes, this trust belongs to the surviving spouse.
The Survivor’s Trust is fully revocable. The surviving spouse is the trustee and the sole beneficiary. They can amend it, change beneficiaries, spend the principal, or even terminate the trust entirely. This structure provides maximum flexibility for the survivor to adapt to changing circumstances. No complex administration or separate tax ID number is required until the second spouse passes.
The trade-off for this control is on the tax side. Because the surviving spouse retains full ownership, all assets in the Survivor’s Trust are included in their taxable estate upon death. If the value of those assets—plus the survivor’s other personal assets—exceeds their own estate tax exemption, the excess will be taxed.
The Exemption Trust: Stewardship and Tax Efficiency
The Exemption Trust (the “B” Trust) is a more deliberate and strategic instrument. It is designed with one primary goal: to capture the deceased spouse’s estate tax exemption and permanently remove those assets from the surviving spouse’s taxable estate. Stewardship.
Upon its creation, the Exemption Trust becomes irrevocable. The surviving spouse cannot change its terms or its ultimate beneficiaries—who are typically the couple’s children. While the survivor is often the lifetime beneficiary and can receive income from the trust (and sometimes principal for needs like health and education), they do not own or control the assets. They are a beneficiary, managed by a trustee—who may even be the surviving spouse, but with strict fiduciary duties.
This is where the term “bypass” comes from. The assets in this trust bypass the surviving spouse’s estate for tax purposes. When the survivor passes away, the contents of the Exemption Trust are distributed to the named beneficiaries, free of any additional estate tax.
This strategy is particularly important in New York. Unlike the federal system, New York law does not allow for “portability”—the ability of a surviving spouse to use any unused portion of their deceased spouse’s exemption. As defined under Article 26 of the New York Tax Law, once a spouse dies without using their exemption, it is gone forever. An Exemption Trust is the primary legal tool we have in New York to preserve it.
Beyond Taxes: Asset Protection
An Exemption Trust does more than save on taxes. Because the assets are held in an irrevocable trust, they are also shielded from the surviving spouse’s future risks. This can include protection from creditors, lawsuits, or claims from a subsequent marriage. For many families I represent, this protection for the next generation is just as valuable as the tax savings.
Choosing between these structures—or implementing a plan that uses both—is a foundational decision. It is a conversation about your family’s values. Do you prioritize maximum flexibility for the surviving spouse, or is the primary goal to ensure the most efficient and protected transfer of wealth to your children? There is no single right answer, only the one that aligns with your intentions for the legacy you have built.
If you and your spouse have a joint estate that may be subject to New York estate tax, the prudent next step is to map out how your assets would be allocated upon the first death. We can schedule a confidential review to analyze your current estate structure against these two foundational trust strategies.
