Estate planning in Australia has become increasingly complex, especially for families with significant assets. Among the more advanced tools available, the A-B trust structure stands out for its ability to minimise tax, protect inheritances, and ensure a smooth transfer of wealth between generations. As we move into 2025, changes in tax policy and ongoing shifts in family dynamics make it crucial to understand how A-B trusts work, and whether they’re right for your estate plan.
What Is an A-B Trust and How Does It Work?
An A-B trust, also known as a split trust or bypass trust, is an estate planning structure designed to help married couples minimise estate taxes and maximise asset protection. When the first spouse passes away, the trust splits into two separate trusts:
- Trust A (Survivor’s Trust): Holds the surviving spouse’s share of the assets. The surviving spouse retains full control over these assets.
- Trust B (Bypass or Family Trust): Holds the deceased spouse’s share. This trust is irrevocable, and its assets are managed for the benefit of the surviving spouse and, eventually, the couple’s children or other beneficiaries.
The fundamental advantage is that assets in Trust B “bypass” the surviving spouse’s estate, so they aren’t subject to estate tax again when the second spouse dies.
Why Are Australians Looking at A-B Trusts in 2025?
While Australia does not have a federal estate or inheritance tax as of 2025, several factors are driving renewed interest in A-B trusts:
- Capital Gains Tax (CGT) Planning: The 2025 budget tightened exemptions and increased scrutiny on family trusts, but strategic structuring—like A-B trusts—can still help manage CGT liabilities on inherited assets.
- Blended Families and Second Marriages: With more Australians remarrying or forming blended families, A-B trusts can ensure children from previous relationships are not accidentally disinherited.
- Centrelink and Aged Care Means Testing: Properly structured trusts may help shield some assets from means testing, potentially preserving Centrelink entitlements for a surviving spouse.
- Intergenerational Wealth Transfer: A-B trusts can lock in asset protection, preventing creditors, bankruptcy, or relationship breakdowns from eroding family wealth.
Recent changes, such as the ATO’s 2025 crackdown on trust distributions to adult children, highlight the need for careful, up-to-date structuring.
How to Set Up an A-B Trust in Australia
Establishing an A-B trust requires legal expertise and tailored advice. Here’s a simplified overview of the steps:
- Work with an Estate Planning Lawyer: Australian law does not recognise “A-B trusts” by name, but the structure is achieved using testamentary trusts and careful drafting of wills.
- Draft the Will: The will must specify that on the first spouse’s death, assets are divided between a survivor’s trust (A) and a family/bypass trust (B).
- Appoint Trustees: Choose who will manage each trust. Often, the surviving spouse is trustee of both, but co-trustees may be appointed for additional oversight.
- Specify Beneficiaries: Outline who benefits from each trust and under what conditions. This can include children from previous marriages, charities, or other family members.
Costs for setting up these structures in 2025 typically range from $4,000 to $10,000 depending on complexity and legal fees. Ongoing trust administration and tax compliance should also be factored in.
Real-World Example: Protecting Both Spouses and Children
Consider Helen and Mark, a Sydney couple with $2.5 million in combined assets and children from previous relationships. Helen wants to ensure Mark is financially secure if she passes away first, but also that her own children ultimately inherit her share. Their will establishes an A-B trust structure. When Helen dies, her share of assets moves into Trust B (for her children), while Mark’s share stays in Trust A. Mark receives income from Trust B for life, but cannot change its ultimate beneficiaries. This arrangement meets both spouses’ wishes, even as laws change.
Key Considerations and 2025 Policy Watchpoints
- ATO Focus: The ATO continues to scrutinise trust arrangements, especially where tax minimisation is a primary driver. Transparent, arm’s-length management is crucial.
- Family Law Risk: Trust assets can sometimes be included in divorce settlements or family provision claims if not properly structured.
- Succession Planning: As superannuation balances grow, integrating super with testamentary trusts is a growing trend in 2025.
With policy changes on the horizon and family structures evolving, the strategic use of A-B trusts should be revisited regularly, especially after major life events or legislative updates.
