April, 2026
Why an old estate planning tool deserves a fresh look, and how getting it right can make a meaningful difference for your family.
Estate plans age. Life circumstances change. Tax law evolves. And yet the documents sitting in most families’ files were drafted years ago, sometimes decades ago, under a very different set of assumptions about how wealth would be taxed at death.
One of the most common artifacts of that earlier era is the bypass trust, sometimes called a credit shelter trust or a family trust. For couples who created estate plans in the 1990s or early 2000s, this structure was nearly universal. Today, some of those same plans may be working against the people they were designed to protect.
This is not a reason to panic. It is a reason to review.
A Quick Recap: What the Bypass Trust Was Designed to Do
For most of the twentieth century, the federal estate tax exemption was modest, often $600,000 or less per person. For a married couple with a combined estate of $2 million, this created a real problem. If the first spouse to die left everything outright to the survivor, the estate would pass tax-free under the marital deduction. But at the second death, only one exemption would be available. A large portion of the estate could face estate taxes at rates that once reached 55 percent.
The bypass trust solved this problem elegantly. At the first spouse’s death, assets up to the exemption amount were placed in a separate trust (the bypass trust) rather than passing directly to the surviving spouse. This trust was structured so that it did not count as part of the survivor’s taxable estate at death. In effect, it “bypassed” the second estate, allowing both spouses’ exemptions to be used.
For families with meaningful assets, this was sound planning. The math worked, the structure made sense, and attorneys drafted these provisions into nearly every estate plan for couples above a certain wealth threshold.
What Changed
The landscape shifted significantly in 2001 with the Economic Growth and Tax Relief Reconciliation Act, and again with the Tax Cuts and Jobs Act of 2017. The federal estate tax exemption, which stood at $675,000 in 2001, has grown dramatically. In 2026, following the passage of the One Big Beautiful Bill Act, it stands at $15 million per individual, meaning a married couple can shield $30 million from federal estate tax before a bypass trust structure is even necessary.
Equally important, Congress introduced portability in 2010. Portability allows a surviving spouse to claim the unused portion of a deceased spouse’s exemption, provided a timely election is made on the estate tax return. For many couples, this development essentially replicates the core benefit of a bypass trust without the need for a separate trust structure at all.
These changes did not eliminate the bypass trust as a useful tool. But they did change the calculus significantly, and they exposed a problem for many families whose plans were drafted before these provisions existed.
The Potential Downside of an Outdated Structure
Here is where it gets important. Assets that pass into a bypass trust at the first spouse’s death receive a step-up in cost basis at that time. But they do not receive a second step-up at the surviving spouse’s death. Assets held outright by the surviving spouse, by contrast, receive a full basis step-up at the second death.
In a low-exemption environment, this was an acceptable tradeoff. The estate tax savings far outweighed the capital gains cost. But in today’s environment, where most families face little or no estate tax exposure, the tradeoff can look very different.
Consider a simple example. A couple has a taxable brokerage account with $1 million in appreciated securities, purchased decades ago at a cost basis of $200,000. The first spouse dies. Under a bypass trust structure, those assets fund the trust at a stepped-up basis of $1 million. The trust grows to $1.5 million by the second spouse’s death. The heirs sell those assets and owe capital gains tax on $500,000 of appreciation, the growth that occurred inside the trust.
Now consider what happens if those same assets pass outright to the surviving spouse instead. At the second death, the assets receive a fresh step-up to fair market value, say $1.5 million. The heirs inherit with a $1.5 million basis. If they sell, they owe nothing.
For families without meaningful estate tax exposure, the capital gains cost of an outdated bypass trust can be significant. This is not a hypothetical concern. At RSS, this is something that we encounter quite frequently.
When the Bypass Trust Still Makes Sense
This is not a blanket argument against bypass trusts. There are situations where the structure remains highly valuable.
For couples with larger estates, particularly those approaching or exceeding the federal exemption, or who have state estate tax exposure in states with lower thresholds, the bypass trust continues to serve its original purpose. California does not have a state estate tax, which simplifies the analysis somewhat for our clients here. But clients with property or domicile connections to states like Oregon, Massachusetts, or Washington may face lower exemption thresholds and should plan accordingly.
The bypass trust also provides important non-tax protections that are easy to overlook. Assets held in trust are generally protected from a surviving spouse’s future creditors. They can be structured to protect against remarriage, ensuring that children from a prior relationship, for example, ultimately receive their share. And they provide a layer of control over how and when assets pass to the next generation.
For blended families, clients with liability exposure, or families where the surviving spouse’s financial judgment may be uncertain, the bypass trust offers protections that portability simply cannot replicate.
Formula Clauses: A Hidden Complexity
Many older bypass trust plans include what attorneys call a “formula clause,” a provision that automatically funds the bypass trust up to the full available exemption at the first death. When the exemption was $600,000, this was a straightforward calculation. When the exemption is $15 million, a formula clause can inadvertently divert a large portion of the estate into the trust, reducing flexibility for the surviving spouse and potentially triggering the capital gains issues described above.
This is one of the more subtle and consequential planning gaps we encounter. The documents may look fine on the surface. The trust was properly drafted, the attorney was reputable, the family signed everything correctly. But the formula clause is silently waiting to operate in a way that no longer serves the family’s interests.
Reviewing formula clauses and updating them where appropriate can be a meaningful part of the estate coordination work we do with clients at RSS.
How We Approach This at RSS
Estate planning coordination is one of the quieter parts of what we do, but it is among the most consequential. Over the years, we have worked through these questions with many of our clients, reviewing documents, identifying gaps, and helping families understand what their plans actually say and what the implications are.
Our role is not to draft documents. That is the attorney’s work, and we maintain close relationships with a number of excellent estate planning attorneys in the Bay Area who handle the legal side with care and precision. Our role is to be the person in the room who has read the documents, understands how the investment accounts and trust structures interact, and can help translate complex legal language into plain English for the families we serve.
In practice, this often looks like a conversation that starts with a document review. We ask to see the trust and will, and we review it alongside the account titling, beneficiary designations, and the family’s current financial picture. Frequently, we find that the plan made perfect sense when it was written but has not kept up with changes in the law, changes in the family, or changes in the size of the estate.
When an outdated bypass trust structure comes up, we walk clients through the tradeoffs clearly. What is the estate tax exposure today? What does the formula clause do? What are the assets, and what is the embedded gain? Is there a reason, such as creditor protection, family dynamics, or blended family considerations, that preserves the case for the trust? Or does a simpler structure serve the family better?
These are not one-size-fits-all questions, and we are careful not to treat them as such. Some clients update their documents. Some clients make targeted modifications to their formula clauses. Some clients decide, after a thorough review, that their existing plan still serves them well. The goal is always to make sure the decision is an informed one.
A Note on Timing
The landscape changed again meaningfully in 2025. The One Big Beautiful Bill Act, signed into law on July 4, 2025, raised the federal exemption to $15 million per individual and made the elevated exemption permanent. Starting in 2027, the amount will be indexed for inflation thus becoming even larger.
This does not mean planning is less important. It means the calculus has shifted. For most families, the priority is no longer racing to use the exemption before it shrinks. The priority is reviewing existing plans that were built around a world of scarcity: lower exemptions, no portability, aggressive use of bypass trust structures. The question to ask is whether those plans still serve the family well under a fundamentally different set of rules.
For most of our clients, however, the more pressing issue is the existing plan sitting in a file drawer that has not been reviewed in a decade. That is where the most actionable work typically lives.
If you have questions about how your estate plan is structured, or if it has been a while since anyone has looked at it closely, we would welcome the conversation. These reviews do not need to be complicated. Often, a single meeting is enough to identify whether the plan still makes sense or whether it is time for an update. Reach out to us at RSS and we will take it from there.
Conclusion: Your Next Steps
If your estate plan hasn’t been reviewed in recent years, now is a good time to take a closer look. Reach out to RSS to start the conversation.
