Is Your Old Estate Plan Creating an Unnecessary Tax Bill for Your Family?

When was the last time you reviewed your will or estate planning documents?

For many families, the answer is 10, 15, or even 20 years ago. Perhaps you met with an attorney when your children were young, established a will or trust, and checked estate planning off your financial to-do list.

At the time, your attorney may have recommended a strategy known as an A/B Trust, sometimes called a Credit Shelter Trust or Bypass Trust.

For decades, these trusts were a common and effective way to help married couples reduce federal estate taxes.

But the tax landscape has changed dramatically. And for some families, the very provisions intended to save taxes could now result in an unnecessarily large tax bill for their heirs.

Why A/B Trusts Were So Popular

To understand the problem, it helps to understand why these trusts were created in the first place.

In 2001, the federal estate tax exemption was just $675,000 per person. For married couples with substantial savings, retirement assets, investments, and a home, estate taxes were a legitimate concern.

An A/B Trust was designed to preserve both spouses' estate tax exemptions.

When the first spouse passed away, assets were divided into two trusts:

• Trust A (Survivor's Trust): Assets generally remained available to the surviving spouse and would be included in their taxable estate.

• Trust B (Bypass Trust): Assets up to the deceased spouse's available estate tax exemption could be placed in an irrevocable trust. These assets would generally remain outside the surviving spouse's taxable estate, even as they appreciated.

This structure could provide significant estate tax savings, particularly when exemptions were relatively low.

For many families, it was an excellent planning strategy.

Fast Forward to 2026: The Rules Have Changed

Today, the federal estate tax exemption is dramatically higher.

In 2026, an individual can generally pass $15 million free of federal estate tax, or potentially $30 million for a married couple with appropriate planning.

The federal exemption is also scheduled to increase with inflation in future years.

Additionally, a provision known as portability, introduced in 2011 and made permanent in 2013, allows a surviving spouse to preserve the deceased spouse's unused federal estate tax exemption through a timely estate tax return filing.

This means many families no longer need a mandatory A/B Trust structure simply to preserve both spouses' exemptions.

But here's the problem: Your estate planning documents don't automatically update when tax laws change.

Many wills and trusts drafted before these changes contained strict formulas, often called formula funding provisions, that automatically determined how much of the deceased spouse's estate would fund the bypass trust.

These provisions were designed to maximize the use of the estate tax exemption available at the time, often without providing much flexibility to account for future changes in tax law.

As a result, an estate plan written decades ago may still direct assets into an irrevocable bypass trust even when doing so provides little or no federal estate tax benefit.

And that could have significant consequences.

The Hidden Tax Problem: Losing a Step-Up in Cost Basis

One of the most valuable tax benefits available to heirs is something called a step-up in cost basis.

When someone inherits an appreciated investment, the asset's tax basis is generally adjusted to its fair market value at the owner's death.

This can eliminate years, or even decades, of unrealized capital gains for income tax purposes.

However, assets held in a traditional bypass trust generally do not receive a second step-up in cost basis when the surviving spouse passes away, because those assets are excluded from the surviving spouse's taxable estate.

Let's look at an example.

$1 Million Difference in Taxable Gains

Imagine a married couple with a $3 million estate. Their estate plan was drafted in the early 2000s and includes a mandatory A/B Trust provision.

When the first spouse passes away, $1 million in taxable investments is placed into the bypass trust. At that time, those investments have a tax basis of $1 million.

Over the next 15 years, those investments grow to $2 million.

When the surviving spouse passes away, the investments pass to their children.

Here's where the distinction becomes important:

Scenario 1: Assets held in the bypass trust

• Value at the surviving spouse's death: $2,000,000

• Tax basis: $1,000,000

• Unrealized capital gain: $1,000,000

If the children sell the investments immediately for $2 million, they may recognize $1 million in taxable capital gains.

Scenario 2: Assets included in the surviving spouse's estate

Had the assets instead been structured to qualify for a basis adjustment at the surviving spouse's death:

• Value at death: $2,000,000

• Adjusted tax basis: $2,000,000

• Unrealized capital gain immediately after death: $0

In this simplified example, the difference is $1 million in potentially taxable capital gains, despite neither scenario creating a federal estate tax liability.

At an illustrative combined federal and state capital gains tax rate of 20%, that could represent $200,000 in additional taxes if the investments were sold.

And the frustrating part?

The original trust was established specifically to save the family money on taxes.

This illustration assumes appreciated taxable investments, no intervening sales or basis adjustments, and eligibility for a basis adjustment in the second scenario. Actual tax results depend on the assets, trust provisions, and beneficiaries' tax circumstances.

How Modern Estate Planning Has Evolved

Estate planning attorneys have increasingly incorporated more flexibility into wills and trusts to account for changing tax laws and family circumstances.

Rather than requiring a rigid division of assets into A/B Trusts, an estate plan today might utilize:

• Disclaimer Trust Provisions: These allow a surviving spouse to disclaim certain inherited assets, which can then pass into a bypass trust if appropriate. This gives the family an opportunity to evaluate the estate tax laws and financial circumstances at the time of the first spouse's death rather than committing to an automatic trust structure decades in advance.

• Flexible Marital Trust and QTIP Provisions: Certain trusts can provide financial support for a surviving spouse while preserving control over the ultimate beneficiaries. Depending on how the trust is structured and the applicable tax elections, these arrangements may also preserve eligibility for a basis adjustment at the surviving spouse's death.

• Revocable Living Trusts with Flexible Distribution Provisions: These can provide for the orderly management and distribution of assets while allowing the estate plan to adapt to changing needs. They may also include optional bypass trust provisions rather than requiring automatic funding.

The important distinction is that many modern estate plans seek to preserve flexibility, allowing decisions to be made with knowledge of the tax laws, asset values, and family circumstances that exist when a spouse passes away.

That flexibility can help balance estate tax considerations, capital gains taxes, asset protection, and the family's wishes.

Of course, no single trust structure is appropriate for everyone, and even flexible provisions can carry administrative requirements, legal deadlines, and tradeoffs.

Does That Mean A/B Trusts Are Bad?

Not at all.

A/B Trusts can still be extremely valuable in the right circumstances.

For families with significant wealth, they can help shield future appreciation from estate taxes. They may also provide creditor protection, preserve assets for children from a prior marriage, or prevent a surviving spouse from changing the ultimate beneficiaries.

Additionally, certain states impose their own estate taxes with exemption amounts substantially lower than the federal threshold.

These are legitimate planning considerations.

The issue isn't that A/B Trusts are inherently outdated.

The issue is that a strategy designed around yesterday's tax laws may no longer accomplish what your family needs today.

When Was the Last Time You Reviewed Your Estate Plan?

If your estate planning documents are more than 15 years old, there's a good chance a review is overdue.

And there are two important reasons why.

First, your wishes may have changed.

Think about how much can happen over 15 or 20 years. Children grow up, grandchildren arrive, relationships change, and financial circumstances evolve.

The people you named as executors, trustees, or beneficiaries may no longer be the people you would choose today.

Even if your documents were perfectly designed when they were drafted, they may no longer reflect what you want for your family.

Second, the way your wishes are carried out may be outdated.

Tax laws, estate planning strategies, and financial planning techniques have changed significantly over the past two decades.

Your intentions may be exactly the same as they were when you first signed your documents, but the legal provisions designed to accomplish those intentions may no longer be the most effective way to do so.

That's why I encourage clients to bring their estate planning documents into our financial planning conversations.

We can review how your existing documents fit into your broader financial picture, identify provisions that may warrant another look, and determine whether your current estate plan still aligns with your goals.

When changes are appropriate, we can coordinate with your estate planning attorney to ensure your documents accurately reflect your wishes while taking advantage of today's planning opportunities.

Estate planning isn't something we should do once and forget about.

Our families change. Our financial situations change. And tax laws change.

Your estate plan should evolve alongside them.

At Blue Bell Private Wealth Management, we believe meaningful financial planning isn't always about making dramatic changes. Sometimes, it's about revisiting an old decision and making sure it's still working in your favor.

One small step today could make a significant financial difference for the next generation.