Old Estate Tax Trusts Can Now Leave Heirs With a Bigger Tax Bill
With couples able to shield $30 million from estate tax, old shelter trusts can cost families a valuable break on appreciated assets.
TheStreet.com · Bank of America warns families are wrong about irrevocable trustsIf you set up an irrevocable trust (a trust you cannot simply take back or change on your own) more than a decade ago to outsmart the estate tax, that trust may now be doing your heirs more harm than good.
The reason is that the exemption rose. The estate tax is the federal tax on passing a large fortune at death, and Congress lets each person shield a certain amount from it. On January 1, 2026, that shield rose to $15 million per person, or $30 million for a married couple, and it will rise with inflation each year.
Many older trusts were built for a much smaller shield. A trust drawn up in 2008 or 2012 was designed when the shield was about $5 million for each person, less than one third of today's amount. Back then, the standard move for a married couple was a bypass trust, sometimes called a credit shelter trust. When the first spouse died, assets worth up to the exemption went into the trust, where they could grow outside the surviving spouse's taxable estate and pass to the children without another round of estate tax.
That protection came with a tradeoff that matters much more now. Assets a person owns directly generally get what accountants call a stepped-up basis at death, meaning their taxable value is reset to what they are worth on that day. If children later sell stock or a house that has appreciated for decades, they pay capital gains tax, the tax on the profit from a sale, only on the growth after that reset.
Assets held inside an older bypass trust generally do not get that second reset when the surviving spouse dies. The children inherit the original taxable value, so they can owe substantial capital gains tax on a lifetime of appreciation.
For some families, especially where the trust holds assets that have grown in value, that is now a bad bargain. For a couple worth well under $30 million, the bypass would likely save no federal estate tax while costing them the reset they would otherwise receive, though state taxes may still apply. Restructuring the old trust under current law can, in some cases, restore that tax break and leave heirs with far less to pay.
Questions people ask
What exactly is a stepped-up basis?
A stepped-up basis resets the taxable value of an asset, like stock or a home, to its market price on the day its owner dies. Heirs then pay capital gains tax only if they sell it for more than that reset value, not on decades of earlier growth.
Does everyone with an old bypass trust owe these extra capital gains taxes?
Probably not. The estate tax applies only above the exemption, so a couple worth well under $30 million would likely owe no federal estate tax whether they have a bypass trust or not. An estate lawyer can confirm whether your state imposes its own, lower estate tax.
Can an old irrevocable trust actually be changed?
Often, yes, depending on the state. Many states allow an older trust to be revised when the trustee and beneficiaries agree, or through other legal steps. A family needs an estate lawyer to check what its state and its own trust document allow.