Why a Trust Created in the 1990s May No Longer Fit Today’s Estate Tax Landscape

A revocable living trust prepared in the 1990s may still be legally valid. However, validity does not necessarily mean that the trust remains suitable for the family’s current circumstances or today’s tax laws.

Many trusts drafted during the 1990s were designed around a federal estate tax exemption of approximately $600,000 to $650,000 per person. By contrast, the federal estate and gift tax exemption is $15 million per person in 2026, subject to inflation adjustments in later years. California currently imposes no separate state estate or inheritance tax.

This substantial change can make some older estate plans unnecessarily complicated—and, in certain circumstances, less tax-efficient.

The Estate Tax Environment in the 1990s

During much of the 1990s, the federal estate tax exemption was only $600,000 per person. It increased to $625,000 in 1998 and $650,000 in 1999. Estates exceeding the applicable exemption could be subject to federal estate tax at comparatively high rates.

Because the exemption was relatively low, married couples commonly used an “A-B trust,” also called a “credit shelter trust,” “bypass trust,” or “exemption trust.” Upon the first spouse’s death, the trust estate was divided into two or more separate trusts:

1. The survivor’s trust, generally holding the surviving spouse’s share; and

2. The bypass or exemption trust, holding assets up to the deceased spouse’s available estate tax exemption.

The principal goal was to preserve the first spouse’s exemption rather than allowing it to go unused. At the time, this structure was an important estate tax planning tool.

Today’s Federal Estate Tax Exemption Is Much Higher

For 2026, the federal estate and gift tax exemption is $15 million per individual. A married couple may potentially protect up to $30 million through a combination of available exemptions and proper planning.

Federal law also permits “portability.” If the appropriate federal estate tax return is timely filed after the first spouse’s death, the surviving spouse may be able to use the deceased spouse’s unused exemption. Portability was not available when many 1990s trusts were drafted.

As a result, a mandatory A-B trust arrangement may no longer provide a meaningful estate tax benefit for a California married couple whose combined estate is well below the federal exemption.

How an Older Trust Can Create Unintended Problems

An outdated trust is not automatically defective. Nevertheless, provisions designed for the 1990s may create consequences that the settlors—the persons who established the trust—would not choose today.

1. A Mandatory Trust Division May Add Unnecessary Complexity

An older trust may require the trustee to divide assets after the first spouse’s death, even if no federal estate tax is expected. The surviving spouse may then need to:

• Obtain appraisals and date-of-death asset values;

• Allocate assets among multiple trusts;

• Maintain separate accounts and records;

• File separate fiduciary income tax returns;

• Track principal and income distributions; and

• Comply with restrictions on the use of bypass trust assets.

These requirements can increase administrative costs and reduce the surviving spouse’s flexibility.

2. Assets May Miss a Second Basis Adjustment

Capital gains tax considerations have become increasingly important for estates that are not subject to federal estate tax.

Generally, inherited assets receive an adjustment in income tax basis to their fair market value at the owner’s death. Assets included in the surviving spouse’s taxable estate may receive another basis adjustment when the surviving spouse later dies.

Bypass trust assets generally are not included in the surviving spouse’s taxable estate. Accordingly, those assets may not receive a second basis adjustment at the surviving spouse’s death.

For example, assume stock placed in a bypass trust was worth $500,000 when the first spouse died and is worth $1.5 million when the surviving spouse dies. If the stock does not receive a second basis adjustment, the beneficiaries could inherit a substantial unrealized capital gain. A structure originally intended to save estate tax may therefore generate greater capital gains tax exposure when no estate tax would otherwise have been due.

The applicable result depends on the trust terms, ownership history, tax elections, asset type, and law in effect at each death.

3. The Surviving Spouse May Have Limited Control

An older bypass trust may restrict how much principal the surviving spouse can receive. Distributions may be limited to health, education, maintenance, and support, or may require approval from an independent trustee.

These restrictions may be useful where asset protection, remarriage concerns, or preservation of assets for children is a priority. However, they may be unnecessarily burdensome where the couple’s principal objective is to provide maximum flexibility for the surviving spouse.

4. Formula Clauses Can Produce Unexpected Results

Many 1990s trusts use tax formulas rather than fixed dollar amounts. For example, a trust may direct the trustee to fund the bypass trust with the largest amount that can pass free of federal estate tax.

Because the exemption is now much higher, such a formula may allocate all—or nearly all—of the deceased spouse’s trust estate to an irrevocable bypass trust. That result may leave little or nothing in the more flexible survivor’s trust.

The outcome can differ substantially from what the settlors expected when the document was signed.

5. The Plan May Not Address Portability

Portability allows a surviving spouse, following a timely and properly completed federal estate tax return, to preserve the deceased spouse’s unused federal exemption. Older trusts generally do not discuss portability because it did not exist when they were drafted.

Portability does not eliminate the need for trust planning. It does not apply to the generation-skipping transfer tax exemption, and it may not provide the same creditor protection, appreciation shelter, or control over ultimate beneficiaries as a bypass trust. Nevertheless, it is an important option that a 1990s plan could not have anticipated.

6. California Law and Family Circumstances May Have Changed

California does not currently impose a separate estate or inheritance tax. For many California residents, the federal exemption is therefore the primary transfer-tax threshold.

Tax law is only one reason to review an older trust. Since the 1990s, there may also have been:

• Births, deaths, marriages, or divorces;

• Changes in trustees or beneficiaries;

• Acquisition or sale of real property;

• Significant changes in wealth;

• Relocation to or from another state;

• Changes in a beneficiary’s health or financial capacity;

• New concerns involving creditors, remarriage, or blended families; or

• Changes in California trust and probate law.

Does This Mean Every A-B Trust Should Be Removed?

1. A bypass or credit shelter trust can still serve important purposes, even where the estate is below the federal exemption. Potential benefits include:

• Protecting assets for children from a prior relationship;

• Limiting a surviving spouse’s ability to change the ultimate beneficiaries;

• Providing a degree of creditor protection;

• Protecting assets if the surviving spouse remarries;

• Preserving the deceased spouse’s generation-skipping transfer tax exemption;

• Sheltering post-death appreciation from the surviving spouse’s taxable estate; and

• Planning for future growth or possible changes in tax law.

The appropriate structure depends on the size and composition of the estate, the spouses’ objectives, family relationships, expected asset appreciation, and income tax consequences.

What Should Be Reviewed in a 1990s Trust?

A review should consider more than the federal exemption amount. Relevant questions include:

1. Does the trust require a mandatory division after the first spouse’s death?

2. How are the survivor’s trust and bypass trust funded?

3. Does the document use a formula tied to the federal estate tax exemption?

4. What access will the surviving spouse have to income and principal?

5. Who controls investments and distributions?

6. Could bypass trust assets lose the opportunity for a second basis adjustment?

7. Does the plan account for portability?

8. Are the named trustees, agents, and beneficiaries still appropriate?

9. Are retirement accounts and life insurance coordinated with the trust?

10. Does the plan address incapacity under current California law?

Possible Modern Planning Approaches

Depending on the circumstances, an updated estate plan might use:

• A simpler revocable trust with an outright or continuing gift to the surviving spouse;

• A disclaimer trust, allowing tax planning decisions to be made after the first death;

• An optional rather than mandatory bypass trust;

• A marital trust designed to qualify for the federal estate tax marital deduction;

• Provisions permitting tax-sensitive distributions or basis planning;

• Trust protector or amendment powers where legally appropriate; or

• A continuing trust for asset protection and family-control purposes, even when estate tax savings are not the primary objective.

Updating a trust does not necessarily mean eliminating all tax planning. The goal is to preserve useful protections while avoiding restrictions and tax consequences that no longer serve the family.

Conclusion

A trust created in the 1990s may have been well designed for the law in effect when it was signed. At that time, an estate of more than approximately $600,000 could face federal estate tax, making mandatory A-B trust planning highly relevant.

In 2026, the federal estate and gift tax exemption is $15 million per person, and California has no separate estate or inheritance tax. For many families, the primary concern has therefore shifted from federal estate tax avoidance to flexibility, administration, asset protection, and income tax basis planning.

An older trust should not be discarded merely because of its age. It should, however, be reviewed to determine whether its tax formulas, mandatory trust divisions, fiduciary appointments, and distribution provisions still accomplish the settlors’ objectives under current law. Working with an Estate Planning Attorney can help you determine if your trust is still functioning the way you intended.