New $15M Estate Exemption Is Breaking Old Wills and Trusts

Full analysis

The One Big Beautiful Bill Act, signed in July 2025, permanently set the federal estate tax exemption at $15 million per individual ($30 million per couple), effective January 1, 2026. Millions of estate plans written before this year contain "formula clauses" that automatically direct assets based on the exemption amount — and those formulas are now moving far more money than their authors ever intended. A document written in 2004 that told the trustee to fund a bypass trust (also called a credit shelter trust, a common device used to shelter assets from estate tax) with the largest amount passing free of estate tax now sweeps $15 million into that trust instead of the $1.5 million the drafter anticipated. For a couple with a $12 million estate, that can mean the surviving spouse — particularly a second spouse — receives nothing from the marital share, effectively disinheriting them.

The basis problem is equally serious and often overlooked. Assets placed in a bypass trust at the first spouse's death do not receive a fresh "step-up in basis" (a reset of the asset's cost basis to current market value, which reduces taxable gains) at the survivor's death. For families now comfortably below the $15 million threshold, the estate tax the bypass trust was built to avoid is zero — but the capital gains exposure it created is real and growing. Estate planning attorney Salvatore Milazzo gives the example of California real estate funded into a bypass trust in 2006 with a $600,000 basis that may be worth $5 million today; heirs inherit the old basis, not the current value. Remedies exist — including decanting the trust (pouring assets into a new one with updated terms), non-judicial settlement agreements among beneficiaries, or granting a general power of appointment so assets return to the survivor's taxable estate — but all require deliberate action, ideally before the first spouse dies. Anyone with an estate plan drafted before 2026, especially one containing formula-based trust funding language, should have it reviewed now.