Many existing trusts, particularly those established before July 2025, are now outdated following the One Big Beautiful Bill Act (OBBBA) of 2025, which permanently raised the federal estate and gift tax exemption to $15 million per person as of January 1, 2026, with annual inflation adjustments. This change eliminated the anticipated "sunset" of the exemption and instead significantly increased it, making estate tax avoidance less relevant for most taxpayers. Consequently, trusts designed for a lower exemption environment, such as credit-shelter trusts or A/B trusts, may no longer be necessary and can introduce unintended problems like loss of basis step-up and higher income taxes.
Old irrevocable trusts can lead to various issues, including unnecessary tax complexity, administrative burdens, and governance structures that no longer align with family needs. For instance, assets in bypass trusts or older A/B trust structures might not receive a step-up in cost basis at death, leading to increased capital gains taxes for heirs. Additionally, rigid distribution rules can limit flexibility for future generations, and outdated fiduciary roles may not reflect current relationships. State income tax has become a significant concern, with many states taxing trusts based on trustee residency, administration location, or beneficiary residency, necessitating potential relocation or division of trusts to reduce tax drag.
Advisors emphasize that the key is not whether a trust is irrevocable, but whether it still serves the family's current needs, tax posture, and multigenerational goals. If not, proactive steps are recommended. Simpler options should be evaluated first, but more complex mechanisms like trust decanting (pouring assets into a new trust with updated terms) or nonjudicial settlement agreements (allowing modification without court involvement) are available and increasingly facilitated by modernized state laws. It is crucial for advisors to gather all relevant trust documents and conduct a thorough review with estate counsel to ensure the trust remains efficient, considering potential modifications, replacement, or termination to align with current laws and financial objectives.
