7 Estate Plan Mistakes the $15 Million Exemption Just Created
The sunset never came. But the old plan you’re counting on may have quietly broken anyway.
For nearly a decade, the estate planning world had its eye on one date: January 1, 2026. That was when the inflated estate tax exemption from the 2017 Tax Cuts and Jobs Act was supposed to snap back to roughly $7 million per person. Attorneys urged clients to use their exemptions before it was too late. Trusts were drafted with that cliff in mind.
Then, on July 4, 2025, President Trump signed the One Big Beautiful Bill Act. The exemption didn’t drop. It jumped to $15 million per person, or $30 million per couple, and Congress made it permanent. No sunset. Indexed for inflation starting in 2027.
Most people heard the headline and moved on. Great, we’re covered. But here’s the problem: an estate plan isn’t a set-it-and-forget-it document. It’s a machine built for a specific tax environment. And the environment those plans were built for no longer exists. Law firms and CPAs across the country have been sounding alarms since early 2026 about the specific ways pre-2026 estate plans are now misfiring. Here are the seven estate plan mistakes 2026 created that you should check for before your next meeting with your attorney.
The permanent $15 million estate tax exemption eliminated federal estate tax worries for most families, but it also broke many existing estate plans. Formula clauses in older trusts can now sweep entire estates into bypass trusts, killing the basis step-up at the surviving spouse’s death. The planning priority has shifted from avoiding estate tax to preserving the income tax basis step-up, filing for portability, updating beneficiary designations, and coordinating with state-level estate taxes that still apply at much lower thresholds.
1
Your Formula Clause May Have Just Disinherited Your Spouse
This is the big one, and it’s already causing real problems. If your trust was drafted between roughly 2001 and 2024, there’s a good chance it contains a formula clause. These provisions automatically fund a bypass (or “credit shelter”) trust with an amount equal to the federal estate tax exemption, then send the rest to a marital trust for the surviving spouse.
The math used to make sense. When the exemption was $2 million and your estate was $5 million, the formula put $2 million in the bypass trust and $3 million with your spouse. Everyone was taken care of. But apply that same formula today. The exemption is now $15 million. If your estate is $5 million, the formula directs all of it into the bypass trust. Your spouse’s marital trust gets zero.
As estate attorney David Shulman warned in April 2026, this isn’t hypothetical. It’s happening on documents drafted when exemptions ranged from $1 million to $11.18 million. Katten Muchin Rosenman’s year-end planning advisory flagged the same risk, noting that legacy formulae can unintentionally overfund a credit shelter trust and eliminate the marital share entirely. This risk is especially acute in blended families, where the bypass trust may be directed to children from a prior marriage.
Pull your trust documents and look for language referencing “the maximum amount that can pass free of federal estate tax” or “the applicable exclusion amount.” If your estate is smaller than $15 million, that formula may now direct everything away from your spouse.
Sources: Ginsberg Shulman, Katten Muchin Rosenman
2
You’re Trading a $0 Estate Tax Bill for a Six-Figure Capital Gains Hit
Here’s the planning shift almost nobody outside the legal and tax world is talking about yet. For the vast majority of families, the estate tax is no longer the main risk. Capital gains tax is.
Under IRC Section 1014, assets that pass through your estate at death receive a “step-up” in cost basis to their current fair market value. That means decades of appreciation are wiped clean for your heirs. But assets held inside a bypass trust that isn’t included in the surviving spouse’s estate at their death? No step-up. Your heirs inherit the original cost basis and owe capital gains tax on all the appreciation when they sell.
Measure Law illustrated this in May 2026 with a clear example: a couple with a $4 million estate including a ranch that had appreciated significantly. Their 2010-era formula clause swept everything into the bypass trust at the first death. The ranch was locked inside. When the surviving spouse later died, the family owed capital gains on decades of growth that would have been erased by a basis step-up had the ranch simply remained in the surviving spouse’s estate.
Don’t assume a trust that saved estate tax in 2012 is still saving your family money. If your estate is well under $15 million, a bypass trust funded with low-basis assets like real estate or long-held stocks may now cost your heirs far more in capital gains than it could ever save in estate tax.
Sources: Measure Law, Katten Muchin Rosenman
3
You Skipped the Portability Election Because “No Tax Was Owed”
Portability lets a surviving spouse claim the deceased spouse’s unused federal estate tax exemption. In 2026, that’s potentially an extra $15 million in protection. But it doesn’t happen automatically. The executor has to file IRS Form 706 within nine months of death, even if the estate owes zero tax.
Many families skip this filing because their attorney or CPA tells them no estate tax return is required. Technically true. But “not required” and “not valuable” are very different things. Without the filing, that $15 million of unused exemption vanishes permanently. If the surviving spouse’s own assets grow, or if a future Congress lowers the exemption, that lost election could mean a tax bill of millions.
The IRS does offer a safety net: under Revenue Procedure 2022-32, eligible estates can file a late portability election up to five years after death. But that window applies only to estates that weren’t otherwise required to file. And why rely on a backup plan when a timely filing solves the problem?
If a spouse has died in recent years and no Form 706 was filed, check whether you’re still within the five-year window for a late portability election. For any future death, treat the Form 706 portability filing as non-negotiable, regardless of the estate’s size.
Sources: IRS Form 706 Instructions, Baker Tilly
The formula clause is not the bug. The bug is that nobody goes back and re-reads the document when the law changes underneath it.
4
Your Beneficiary Designations Override Your Entire Estate Plan
You can spend months crafting the perfect trust. But the beneficiary form you filled out during a 15-minute HR onboarding session in 2009 can override every word of it. Retirement accounts, life insurance policies, and annuities all pass by beneficiary designation, not by your will or trust. And those designations win.
A May 2026 report from The Street highlighted how outdated beneficiary forms are quietly redirecting retirement savings to unintended heirs. The stakes are larger than ever: the average 401(k) balance for workers aged 55 to 64 has reached $271,320, according to Vanguard’s 2025 How America Saves report.
An ex-spouse still listed as primary beneficiary on a 401(k)? That account goes to them, not to your current spouse or children, regardless of what your trust says. Avior Wealth Management noted in April 2026 that this problem compounds under the SECURE Act’s 10-year rule, which forces most non-spouse beneficiaries to drain inherited IRAs within a decade, potentially creating a large, compressed tax hit for the wrong person.
Request current beneficiary information from every financial institution that holds retirement accounts, life insurance, and annuities. Confirm that primary and contingent beneficiaries match your current wishes, not the wishes you had when you filled out the form years ago.
Sources: The Street, Vanguard, Avior Wealth
5
Your Trust Exists on Paper but Owns Nothing
An unfunded trust is one of the most common and most preventable estate planning failures. You pay an attorney to draft a revocable living trust. You sign it. You put it in a drawer. But you never retitle your bank accounts, brokerage accounts, or real estate into the trust’s name. At your death, the trust is a perfectly drafted document that controls exactly zero assets.
Everything that wasn’t retitled passes through probate instead, governed by your will (if you have one) or by state intestacy law (if you don’t). The trust’s carefully constructed tax provisions, the spousal protections, the generation-skipping strategies? They apply only to assets the trust actually holds.
This problem existed before the OBBBA, but the new law makes it more consequential. With the planning emphasis shifting toward basis step-up and capital gains management, the specific trust that holds an asset determines whether your heirs get a clean tax slate or inherit decades of embedded gains. Which trust holds which asset now matters more than whether any estate tax is owed.
Ask your attorney for a trust funding review. Walk through every account and property deed to confirm correct titling. This is unglamorous work, but it’s the difference between a plan that functions and one that’s decorative.
6
You Forgot That Your State Has Its Own Estate Tax
The $15 million federal exemption is the number that made headlines. But if you live in one of the dozen-plus states (or the District of Columbia) that impose their own estate tax, the number that actually matters to your family could be far lower.
Kiplinger noted in early 2026 that Massachusetts, for example, has a state estate tax exemption of just $2 million, and it’s not indexed for inflation. Oregon’s threshold sits at $1 million. New York’s is approximately $7.16 million, but it comes with a notorious “cliff”: if your estate exceeds 105% of the exemption, the entire exemption disappears and the full estate is taxed from dollar one.
A couple with a $6 million estate in Massachusetts owes zero federal estate tax under the new law, but the state could collect on the amount above $2 million. If the estate plan was designed purely around the federal exemption, the state tax exposure may never have been addressed. Several states also impose a separate inheritance tax, which applies to what each individual heir receives rather than to the estate as a whole.
If you live in (or own property in) a state with its own estate or inheritance tax, your plan needs to account for both the federal and state thresholds. These are separate systems with separate rules, and the federal fix doesn’t touch them.
Sources: Kiplinger, JRC Insurance Group
7
Your Plan Was Built for a Sunset That Never Happened
For the better part of eight years, the estate planning industry operated under one overriding assumption: the inflated exemption was temporary, and by 2026, it would revert to roughly $7 million per person. Attorneys drafted documents to hedge against that cliff. Clients made large lifetime gifts to use exemptions before they shrank. Trusts were structured to minimize a tax that, for most families, will now never come due.
Katten’s analysis of the OBBBA noted that the permanent $15 million exemption fundamentally shifts the planning priority from transfer tax avoidance to income tax basis management. Plans built for a world where the exemption dropped to $7 million may now contain unnecessarily complex structures, overfunded irrevocable trusts, or provisions that lock assets away from a surviving spouse for no remaining tax benefit.
This doesn’t mean those plans were wrong when they were drafted. They were prudent responses to the information available at the time. But the world they were built for didn’t arrive, and leaving a plan in place that solves a problem that no longer exists is itself a planning mistake.
If your estate plan was drafted or significantly updated between 2017 and 2024 with the sunset in mind, schedule a review with your estate attorney. The question isn’t whether the plan was good. The question is whether it’s still the right plan for the tax law that actually passed.
Source: Katten Muchin Rosenman
Common Questions
What is the federal estate tax exemption for 2026?
The federal estate tax exemption for 2026 is $15 million per individual, or $30 million per married couple using portability. The One Big Beautiful Bill Act, signed July 4, 2025, made this amount permanent with no sunset provision. It will be indexed for inflation starting in 2027. Estates above the exemption are taxed at a top rate of 40%.
What is a formula clause in a trust and why is it a problem now?
A formula clause automatically directs an amount equal to the federal estate tax exemption into a bypass or credit shelter trust. When exemptions were $1 million to $5 million, this worked as intended. With the exemption now at $15 million, the formula can sweep an entire estate into the bypass trust, leaving nothing for the surviving spouse and potentially eliminating the basis step-up at the second death.
Do I still need an estate plan if my estate is under $15 million?
Yes. Federal estate tax is only one piece of the picture. Your estate plan controls who inherits your assets, how trusts are funded, whether your heirs receive a basis step-up on appreciated property, and whether your surviving spouse can access funds. A plan designed solely around estate tax avoidance may now be creating capital gains problems or unintended restrictions.
What is the portability election and how do I make it?
Portability allows a surviving spouse to claim a deceased spouse’s unused federal estate tax exemption. The executor must file IRS Form 706 within nine months of death (with a possible six-month extension). Under Revenue Procedure 2022-32, a late portability election is allowed up to five years after death for estates that weren’t otherwise required to file. If Form 706 is never filed, the unused exemption is permanently lost.
Does the $15 million exemption apply in every state?
No. The $15 million figure is a federal threshold. More than a dozen states and the District of Columbia impose their own estate or inheritance taxes with much lower exemption amounts. Massachusetts and Oregon have exemptions between $1 million and $2 million. New York’s exemption is approximately $7.16 million, but a “cliff” provision eliminates the exemption entirely if the estate exceeds 105% of the threshold.
Rules of thumb only get you so far. Every estate plan reflects a set of assumptions about tax law, family circumstances, and asset values, and those assumptions have shifted significantly since July 2025. If you’d like to talk through how any of this fits your situation, the team at Madison Partners is happy to have that conversation.
This content is for educational purposes only and should not be considered financial, tax, legal, or investment advice. Individual circumstances vary, and readers should consult with a qualified financial advisor, tax professional, or attorney before making decisions based on this information. Madison Partners does not guarantee the accuracy of third-party data cited herein.
