A more thorough explanation:

An AB trust, also known as a bypass trust or credit shelter trust, is a legal tool used by wealthy married couples to maximize their estate tax exemptions. The strategy involves creating two separate trusts after one spouse passes away.

Typically, the deceased spouse's portion of the couple's property, up to the applicable exclusion amount (currently $11.7 million), is put into Trust B (the bypass trust). This trust is irrevocable and will pass to beneficiaries other than the surviving spouse, usually their children. The surviving spouse must follow the trust's plan without overly benefiting from its operation, but this trust often passes income to the surviving spouse to live on for the rest of their life.

The surviving spouse's portion of the property and sometimes the leftover assets of the deceased spouse above the exclusion amount will be put into Trust A. The surviving spouse has control over this trust and may use it as they wish. When the surviving spouse passes, both trusts pass to their named beneficiaries.

This method of dividing assets may save on estate taxes, but only in limited circumstances. Before the Tax Cuts and Jobs Act, many individuals used this to take full advantage of their estate tax exclusions which were less than $6 million. After the Tax Cuts and Jobs Act, this tool can only be beneficial in limited circumstances because the exclusion now is over $11 million which applies to few individuals. Further, now a spouse's exclusion is portable, meaning a deceased spouse's exclusion can be used by the surviving spouse, and this eliminates many of the benefits of a bypass trust. However, many states have no gift taxes or have estate taxes which are not portable which might make bypass trusts still beneficial to wealthy couples.

For example, John and Jane are a wealthy married couple with a combined estate of $20 million. They want to minimize their estate tax liability and decide to create an AB trust. After John passes away, his portion of the estate, up to the exclusion amount, is put into Trust B, which will pass to their children. Jane's portion of the estate and any leftover assets above the exclusion amount are put into Trust A, which she controls. When Jane passes away, both trusts pass to their named beneficiaries, and their estate tax liability is reduced.

It's important to note that using a bypass trust requires specific wording in the creation of these trusts and limits on the surviving spouse's use of the bypass trust. Also, given the high fees involved in planning, managing, and paying for attorney fees for bypass trusts, often a bypass trust may be more costly than the estate tax itself, and sometimes, the estate would incur less taxes outside of the bypass trust by incurring a stepped-up tax basis for property.