The federal estate tax filing threshold is $15,000,000 per person for deaths in 2026, up from $2,000,000 in 2008 (IRS, Estate tax, checked October 14, 2026; IRS, Instructions for Form 706, 2008). Assets held in a bypass trust usually get no new step-up in basis at the second spouse's death.
Why so many couples have an A/B trust
An A/B trust splits a married couple's estate into two shares when the first spouse dies. The "A" share goes to the survivor, often in a marital trust. The "B" share goes into a separate trust, called a bypass trust, credit shelter trust or family trust. The survivor can usually receive income from the B trust, but it is written so it is not part of the survivor's estate.
The reason was the federal estate tax. Property left to a spouse is deductible from the estate (the marital deduction, Internal Revenue Code (IRC) section 2056, checked October 14, 2026). Before 2011, a spouse who left everything to the other spouse wasted his or her own exemption. The B trust used it up at the first death.
The exemptions were much smaller then. The federal estate tax filing threshold was $1,000,000 for deaths in 2002 (IRS, Instructions for Form 706, 2002), $2,000,000 for deaths in 2008 (IRS, Instructions for Form 706, 2008) and $3,500,000 for deaths in 2009 (IRS, Instructions for Form 706, 2009). A couple with $3 million to $5 million in a house, retirement accounts and a brokerage account had a real estate tax problem. An A/B trust was sensible planning.
What changed: a $15 million exemption and portability
Two things changed. First, starting in 2011, the executor of the first spouse to die can pass that spouse's unused exemption to the survivor. This is called portability, and the amount passed is the deceased spousal unused exclusion (DSUE) amount (IRS, Estate tax, checked October 14, 2026).
Second, the exemption grew. The filing threshold is $15,000,000 per person for deaths in 2026 (same IRS page). Public Law 119-21, signed July 4, 2025 and often called the One Big Beautiful Bill Act, set the basic exclusion at $15,000,000 and removed the clause that had made the earlier higher amount temporary (Public Law 119-21, section 70106; IRS, What's new: Estate and gift tax, checked October 14, 2026). The amount is indexed for inflation after 2026 (IRC section 2010(c)(3), checked October 14, 2026). It has no scheduled end date, though Congress can always change it.
Portability is not automatic. The executor must file a timely Form 706 estate tax return, due 9 months after death plus a 6-month extension if requested (IRS, Instructions for Form 706, revised July 2026). An estate that was not otherwise required to file may elect late, up to the fifth anniversary of the death, under Rev. Proc. 2022-32 (July 2022). Many families skip the return because no tax is due, and lose the election.
The second death: where the step-up is lost
When someone dies, heirs generally take a new tax basis equal to the value at the date of death. This is the step-up in basis (IRC section 1014(a), checked October 14, 2026). Gains during the owner's life are not taxed as income.
The step-up applies to property that is "required to be included in determining the value of the decedent's gross estate" (IRC section 1014(b)(9)). A bypass trust is built to stay out of the survivor's gross estate. That kept it away from estate tax when exemptions were $1 million to $3.5 million. It also means there is no second step-up at the survivor's death. Every dollar of growth since the first death is still taxable gain when the children sell.
Now compare a couple with $4 million and a federal exemption of $15,000,000. The survivor's estate would owe no federal estate tax either way. The trust no longer saves federal estate tax, but it can still cost the heirs income tax on the growth. That is the gap this page is about.
Two more details. The DSUE amount is fixed when the first spouse dies (IRC section 2010(c)(4)), while a bypass trust shelters the growth, so for estates near the exemption the comparison can tip the other way. And if the trust sells assets during the survivor's life, trust income reaches the 20% capital gains rate above only $16,250 of taxable income in 2026, versus $613,700 for a married couple filing jointly (IRS, Rev. Proc. 2025-32, October 2025). In community property states, the surviving spouse's half of community property can also be stepped up at the first death (IRC section 1014(b)(6)), which the trust funding may affect. Ask how your documents handled this.
When an A/B trust can still make sense
- State estate tax. Some states tax much smaller estates. New York's basic exclusion amount is $7,350,000 for deaths in 2026 (New York Department of Taxation and Finance, Estate tax, updated December 3, 2025). Washington's is $3,000,000 for deaths from July 1, 2026 (Washington Department of Revenue, Estate tax tables, checked October 14, 2026). A $4 million couple in such a state may still save state tax with a trust.
- Blended families. A trust can give a second spouse income for life and guarantee that what remains goes to the first spouse's children.
- Protection. A trust can guard against a survivor's later creditors, a new spouse, or undue influence, and can provide a trustee if the survivor's health declines.
- Large or fast-growing estates. Where the combined estate may approach the federal exemption, keeping the growth outside the survivor's estate can still matter.
The question is not whether the trust is good or bad. It is whether the reason it was written still applies to you.
Options to ask your estate attorney about
These are general descriptions, not recommendations. Each depends on your documents, your state's law and your family, and each can have tax and non-tax trade-offs. Ask your estate attorney before acting.
- Disclaimer planning in new documents. Instead of a mandatory bypass trust, a will or trust can leave everything to the survivor and let the survivor decide, after the first death, whether to disclaim part into a trust. A qualified disclaimer must be in writing and delivered within 9 months, and the person disclaiming cannot have accepted the property (IRC section 2518(b), checked October 14, 2026).
- Decanting. Some states let a trustee pour an irrevocable trust into a new trust with updated terms. Whether this is available, and what can change, depends on state law and the trust's wording.
- Trust protector powers. Some trusts name a person who can amend administrative or tax terms. Check whether yours does.
- Distributing appreciated assets. If the trustee may distribute principal to the survivor, moving appreciated assets out of the trust puts them back in the survivor's estate, where a step-up may be available at death. This shifts control and protection, so it needs care.
- A power of appointment. If someone can give the survivor a general power of appointment over trust assets, those assets are generally included in the survivor's gross estate (IRC section 2041, checked October 14, 2026), and property acquired through a power of appointment can receive a new basis (IRC section 1014(b)(9)). Drafting matters a great deal here.
Also check how the trust is funded. Many older documents fund the bypass share by a formula tied to the federal exemption. With a $15,000,000 exemption, a formula like that can send far more into the trust than the couple expected. Ask your attorney to read the funding clause with today's numbers.
A plain example with numbers: $4 million couple, one old bypass trust
Hypothetical. A married couple has a $4,000,000 estate. The first spouse dies and the A/B plan puts $1,500,000 of their house and stock into the bypass trust. Those assets get a step-up at the first death, so the trust's basis is $1,500,000. By the survivor's death in 2026 they are worth $2,500,000. The children sell right away for $2,500,000.
| Hypothetical, sale at $2,500,000 | Old bypass trust | If in survivor's estate |
|---|---|---|
| Heirs' basis | $1,500,000 | $2,500,000 |
| Taxable gain at sale | $1,000,000 | $0 |
| Federal tax if all taxed at 15% | $150,000 | $0 |
| Federal tax if all taxed at 20% plus 3.8% | $238,000 | $0 |
| Federal estate tax at second death (2026) | $0 | $0 |
The arithmetic: $2,500,000 sale minus $1,500,000 basis is a $1,000,000 gain. At 15% that is $150,000. At the top 20% rate plus the 3.8% net investment income tax (NIIT), 23.8% of $1,000,000 is $238,000. For 2026 the 15% rate applies to taxable income up to $613,700 for married couples filing jointly and $545,500 for single filers, with 20% above that (IRS, Rev. Proc. 2025-32, October 2025). The NIIT is 3.8% on investment income above modified adjusted gross income of $250,000 for joint filers or $200,000 for single filers (IRS, Topic 559, checked October 14, 2026). Most heirs would land between the two rows, plus any state income tax.
Either way, no federal estate tax is due: even a combined $4,000,000 to $5,000,000 estate is far below the $15,000,000 exemption. In a state with its own estate tax, the right-hand column could owe state estate tax that the trust would have avoided. That is the trade to weigh with your estate attorney and tax professional.
Red flags
- A trust signed before 2011 that has not been read by an attorney since the exemption reached $15,000,000.
- A funding formula tied to "the maximum amount that can pass free of federal estate tax" that no one has re-run with 2026 numbers.
- No Form 706 filed at the first death because "no tax was due," with no discussion of a portability election.
- Highly appreciated stock or real estate sitting in a bypass trust for decades with no review of the basis.
- A trustee selling appreciated trust assets during the survivor's life without comparing trust tax rates to the survivor's own.
- The assumption that a bypass trust is always wrong, without checking state estate tax or family reasons.
- The assumption that a bypass trust is always right, without comparing estate tax saved to income tax lost.
- Advice to change an irrevocable trust with no mention of state decanting law or the trust's own terms.
- A plan that relies on a disclaimer but no one tells the survivor about the 9-month deadline.
- Moving assets out of a trust meant to protect children of a first marriage, with no discussion of that purpose.
Questions to ask before you sign
- Does my trust require a bypass trust at the first death, or does it let the survivor choose by disclaimer?
- How is the bypass share funded, and how much would go into it under today's $15,000,000 exemption?
- Does our state have its own estate tax, and what is its exemption this year?
- If my spouse died first, was a Form 706 filed and was portability elected? If not, are we still within five years?
- What is the current basis and current value of the assets in the bypass trust?
- Does the trust let the trustee distribute principal to me, and should appreciated assets be moved out?
- Does the trust name a trust protector, or allow a power of appointment that could cause inclusion in my estate?
- Does our state allow decanting, and would it fit this trust?
- What would my children's capital gains tax be at my death under the current plan versus an alternative?
- Are there family, creditor or remarriage reasons to keep the trust as it is?
- If we change anything, who coordinates with our tax professional so the income tax side is checked?
Read This Before You Sign
A one-page checklist: the red flags in annuity and indexed universal life (IUL) sales, and the questions to ask before you sign anything. An old-trust review checklist: the funding clause, portability, state estate tax and the step-up questions to ask. We’ll email it to you.
The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax, legal or investment advice. Nothing is sold here. Unsubscribe any time.
Sources
- IRS: Estate tax, filing thresholds by year of death (checked October 14, 2026)
- IRS: What's new, Estate and gift tax (checked October 14, 2026)
- GovInfo: Public Law 119-21, section 70106 (July 4, 2025)
- Cornell LII: 26 U.S.C. 2010, unified credit and DSUE amount (checked October 14, 2026)
- Cornell LII: 26 U.S.C. 1014, basis of property acquired from a decedent (checked October 14, 2026)
- IRS: Rev. Proc. 2025-32, 2026 inflation adjustments (October 2025)
- IRS: Instructions for Form 706 (revised July 2026)
- IRS: Rev. Proc. 2022-32, late portability election (July 2022)
- IRS: Instructions for Form 706, 2009 (applicable exclusion $3,500,000)
- IRS: Topic 559, Net investment income tax (checked October 14, 2026)
- New York Department of Taxation and Finance: Estate tax (updated December 3, 2025)
- Washington Department of Revenue: Estate tax tables (checked October 14, 2026)
The Retirement Literacy Foundation is a 501(c)(3) public charity. This page is general education, not tax, legal or investment advice. Nothing is sold here, no product is recommended, and RLF accepts no funding from financial companies. Rules and figures change; each one above shows its source and date. Check anything you plan to act on with your state insurance department or a qualified professional who is not paid on the product.