Old AB Trusts in California: Why They Can Hurt Your Inheritance

It Could Cost Your Kids a Down Payment on a Condo. Or college tuition. Or seed money for a business. Or the dream wedding.

How This Affects Living Trust Planning in California

Many older estate plans were created under tax rules that no longer apply today. In California, most families now use revocable living trusts [with portability] instead of AB trusts to avoid unintended tax consequences and simplify the transfer of assets. If your plan was created more than 10–15 years ago, it may be worth reviewing to ensure it still matches current law and your goals.

Why AB Trusts Were Popular

AB trusts were commonly used in estate planning during the 1990s and early 2000s when the federal estate tax exemption was much lower. These trusts were designed to reduce potential estate taxes by dividing assets into two separate trusts upon the first spouse’s death. At the time, this structure helped many families preserve more wealth for their heirs under the tax rules that existed then.

Why They are Outdated Today

Over time, federal estate tax exemptions increased significantly, meaning most families no longer face the estate tax issues AB trusts were designed to solve. As a result, many older estate plans still contain structures that are no longer necessary. In some cases, these outdated trusts can create unintended complications rather than providing meaningful tax benefits.

The Hidden Tax Problem for Heirs

One of the biggest overlooked issues with older AB trusts involves capital gains taxes. Assets held inside the bypass trust may not receive a second step-up in basis at the surviving spouse’s death. This can leave heirs with a much higher tax burden when they eventually sell appreciated assets such as real estate or investments.

What Modern Estate Planning Looks Like Now

Most modern estate plans in California rely on revocable living trusts [with portability] instead of AB trusts. These updated structures are designed to simplify administration, maintain flexibility during life, and help ensure assets receive favorable tax treatment when transferred to heirs. Reviewing an older estate plan can help determine whether updates are needed to reflect current law and family goals.