The Estate Tax Exemption Has Changed. Your Trust May Not Have.
The One Big Beautiful Bill Act (OBBBA) permanently increased the federal estate tax exemption to $15 million per individual ($30 million for married couples) beginning in 2026. While this change reduces estate tax exposure for many families, it may also create unintended consequences inside older revocable trusts, particularly those drafted when exemption levels were significantly lower.
At Avion Wealth, we have already seen this issue surface in multiple estate plan reviews.
Where the Issue Arises: “Reduce-to-Zero” Funding Formulas
Many estate plans created in prior years included mandatory funding language designed to minimize estate tax at the first spouse’s death. These provisions often used a “reduce-to-zero” formula, requiring assets to fully fund a family (bypass) trust up to the estate tax exemption amount before any assets pass to the marital trust. When exemption amounts were lower, this structure often made strategic sense. Under the new $15 million exemption, however, the results may differ from what was originally intended.
What Could Happen Under the New Law?
If the first spouse dies with an estate below the $15 million exemption, the formula could direct:
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100% of the estate into the family trust
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0% into the marital trust
While this may not create estate tax liability, it can create planning inefficiencies.
Potential Unintended Consequences
1. Reduced Access for the Surviving Spouse
Assets placed in the family trust are typically governed by a Health, Education, Maintenance, and Support (HEMS) standard. This may limit the surviving spouse’s flexibility compared to outright ownership or marital trust access.
2. Loss of a Second Step-Up in Basis
Assets inside a bypass/family trust generally do not receive a second step-up in cost basis at the surviving spouse’s death. For highly appreciated assets, this could increase capital gains exposure for heirs.
3. Administrative Complexity
Family trusts become separate legal and tax entities, requiring:
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A new tax identification number
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Annual fiduciary income tax filings
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Ongoing administrative oversight
While sometimes appropriate, this may not be necessary for families well below current exemption thresholds.
How This Can Be Addressed
In many cases, this issue can be reviewed and potentially addressed while both spouses are living.
Options may include:
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Replacing mandatory “shall” language with discretionary “may” provisions
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Incorporating disclaimer-based flexibility
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Updating trust language to align with current exemption levels
Any changes should be evaluated in coordination with your estate planning attorney.
Why Periodic Estate Plan Reviews Matter
Tax law evolves. Exemption levels change. Family dynamics shift. Estate planning documents drafted a decade ago may not reflect today’s legal environment, even if your core intentions remain the same.
Periodic review helps ensure your planning structure aligns with:
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Current law
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Liquidity needs
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Business ownership considerations
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Long-term wealth transfer goals
Coordinated Planning Matters
At Avion Wealth, we work alongside your legal and tax professionals to help ensure your wealth transfer strategy reflects both current law and your broader financial objectives. If your estate plan has not been reviewed since the recent legislative changes, this may be an area worth revisiting.
We are also available to provide a complimentary second opinion and can review your estate planning documents in coordination with your attorney if helpful.
To your success,
The Avion Wealth Team