7 Estate Plan Clauses Made Obsolete by the 2026 Tax Law
If your trust was drafted any time between 2012 and mid-2025, parts of it are probably doing the opposite of what you intended.
That’s not a drafting mistake. Your attorney did the right thing at the time. But the One Big Beautiful Bill Act, signed into law on July 4, 2025, made the federal estate and gift tax exemption permanently $15 million per person starting January 1, 2026. A surprising number of clauses written under the old rules now quietly work against the families they were designed to protect.
Here are seven of the most common ones to look for and what to do about each.
The 2026 tax law made the federal estate tax exemption permanently $15 million per individual and $30 million per married couple, according to IRS Revenue Procedure 2025-32. That change quietly broke common estate plan provisions like maximum-funding bypass trust formulas, mandatory AB trust structures, aggressive valuation-discount strategies for sub-$30M estates, and irrevocable gifts that forfeit the step-up in basis. Any plan drafted before July 2025 should be reviewed against the new permanent numbers.
1
Maximum-Funding Formula Clauses for the Credit Shelter Trust
The problem: a single sentence can now disinherit your surviving spouse.
This is the big one. Most older wills and revocable trusts contain a formula that sounds innocuous: “Fund the credit shelter trust with the maximum amount that can pass free of federal estate tax.” When exemptions were $5 million or $7 million, that formula worked as intended. At the new permanent exemption of $15 million per person in 2026, that same sentence can direct up to $15 million into an irrevocable bypass trust, potentially leaving a surviving spouse with little or nothing outright.
The result: a spouse who can’t freely access the home, the investment accounts, or the cash they need for the next 20 or 30 years. Legal to the letter. Disastrous in practice.
If your plan contains a maximum-funding formula and your combined estate is under $30 million, your attorney can often replace it with a disclaimer-based structure or a fixed dollar amount that reflects what you actually want your spouse to have.
Source: Katten Muchin Rosenman — Planning Considerations for 2025 and Into 2026
2
Mandatory AB Trust or Bypass Trust Provisions
For decades, the AB trust (also called a credit shelter or bypass trust) was standard equipment in every married couple’s estate plan. It existed to solve one problem: preserving each spouse’s exemption so it wasn’t wasted at the first death.
Two things killed that problem. First, the IRS made exemption portability permanent, a surviving spouse can now claim the deceased spouse’s unused exemption by filing an estate tax return. Second, the OBBBA locked the combined exemption at $30 million for married couples. The original job of the AB trust, preserving a $600,000 or $1 million exemption no longer exists for the vast majority of families.
What remains is the cost: administrative complexity, a separate trust tax return every year, compressed trust tax brackets (the top 37% rate hits at just $15,200 of undistributed trust income in 2026), and a surviving spouse locked out of assets they may genuinely need.
Assuming the AB structure is still protecting you. For most families under $30M, it’s creating problems it was designed to solve.
Source: Internal Revenue Service, Rev. Proc. 2025-32
3
QTIP Funding Formulas Tied to the Old Exemption
A Qualified Terminable Interest Property trust, a QTIP, lets a surviving spouse receive income for life while you control who ultimately inherits. That structure is still useful, especially in second marriages. What’s often broken is the funding formula.
Older QTIP clauses typically say something like: “After funding the credit shelter trust to the maximum exemption, the balance passes to the QTIP marital trust.” When the exemption was $5 million, a $10 million estate left roughly $5 million for each trust. At the new $15 million exemption, that same $10 million estate now pours everything into the bypass trust and leaves the QTIP and the surviving spouse’s life income stream with zero.
The fix is usually structural, not philosophical. A “Clayton QTIP” or an elective QTIP provision lets the executor decide after death how much goes where, based on the exemption amount actually in effect. It’s flexibility that old formulas don’t provide.
Source: KDA Inc. — Family Trusts and Tax in 2026
A formula directing “the maximum amount that can pass free of estate tax” once funded the bypass trust with $7 million. Under the new $15 million exemption, that same formula can disinherit the surviving spouse.
4
Aggressive Valuation-Discount Strategies for Sub-$30M Estates
Family limited partnerships, family LLCs, and similar structures were built to do one thing: discount the value of assets for transfer tax purposes. If you owned a piece of a family LLC rather than the underlying asset directly, your interest was worth less for estate tax purposes because it was illiquid and non-controlling. Families routinely captured 25–40% valuation discounts.
Here’s the twist. That same discount that reduced estate tax also reduces the cost basis of the asset at death. For families whose estates now fall below the $30 million exemption, meaning they won’t owe federal estate tax anyway, the discount is all downside. Your heirs get a lower stepped-up basis, and they pay capital gains tax on the difference when they sell.
If your estate plan still relies on a family LP or LLC structure and you’re comfortably under the exemption, the math may have flipped. Unwinding or simplifying the structure could save your heirs meaningful capital gains tax.
Source: BNY Wealth — How the OBBBA’s $15M Exemption Reshapes Giving
5
QPRT Provisions and Other “Freeze” Clauses for Smaller Estates
A Qualified Personal Residence Trust transfers your home out of your estate at a discounted gift tax value, letting future appreciation grow outside your taxable estate. Brilliant planning, when you have an estate tax problem.
If your total estate is now comfortably below $30 million for a married couple, the QPRT does three things you may not want: it locks your residence inside an irrevocable trust, it forfeits the step-up in basis your heirs would otherwise get on your death, and it forces you to pay fair market rent to your own trust if you outlive the term. The estate tax savings it was designed to produce? Zero, because you wouldn’t have owed the tax anyway.
The same logic applies to other freeze techniques implemented years ago under lower exemptions, intentionally defective grantor trust sales, intra-family installment notes, and similar moves aimed at sub-$30M estates.
Source: Mercer Advisors — Estate Tax Exemption 2026 Changes
6
“Use It or Lose It” 2025 Sunset Trigger Provisions
For roughly three years leading up to the expected December 31, 2025 TCJA sunset, estate attorneys built language into trusts that was supposed to do one thing: react if the exemption dropped. Provisions that triggered automatic additional gifts. Trust terms that kicked in “if the basic exclusion amount is reduced below $10 million.” Instructions to the trustee to “accelerate all remaining exemption use before sunset.”
The sunset never happened. The OBBBA replaced it with a permanent, inflation-indexed $15 million exemption. But the trigger language is still sitting in thousands of trust documents, and in some cases it now activates on events that were never supposed to occur or worse, fails to activate because its specific conditions can no longer be met.
If your plan was updated in 2023, 2024, or the first half of 2025 specifically to prepare for the sunset, the trigger clauses inside it need to come out or be rewritten. Dead provisions have a way of coming back to life at the worst possible time.
Ask your attorney whether your plan contains sunset-triggered language. If it does, it needs review — not because it’s dangerous on its own, but because it was built for a world that no longer exists.
Source: American College of Trust and Estate Counsel — One Big Beautiful Bill Commentary
7
Irrevocable Gifting Instructions That Ignore the Step-Up in Basis
This is less a specific clause and more a pattern across many plans: language directing that appreciated assets be transferred during life into an irrevocable trust, or gifted outright to children, to “remove them from the taxable estate.”
Under the old rules, that pattern made sense. Under the new rules, for most families, it’s often the wrong move. The step-up in basis under IRC Section 1014 remains unchanged, assets you still own at death receive a new cost basis equal to fair market value on the date of death. Capital gains accumulated over a lifetime get wiped out. Assets you gave away during life? Your heirs inherit your original cost basis and owe capital gains tax on everything above it when they sell.
For estates under the $30 million exemption, holding appreciated assets until death now generally beats gifting them during life. That reverses decades of conventional wisdom. Standing instructions in your trust to “make annual gifts of appreciated securities” or “transfer the investment account to the irrevocable trust” may be costing your heirs five- or six-figure capital gains bills they don’t need to pay.
Model the basis trade-off with your advisor before continuing any lifetime gifting program that was set up under the old exemption rules.
Source: The Tax Adviser — Estate Planning in a Post-OBBBA World
Common Questions
What is the 2026 federal estate tax exemption?
Starting January 1, 2026, the federal estate and gift tax exemption is $15 million per individual and $30 million per married couple, with annual inflation adjustments beginning in 2027. The top estate tax rate remains 40%. This change was made permanent by the One Big Beautiful Bill Act signed into law on July 4, 2025.
Do I still need a bypass trust under the 2026 law?
Probably not, if your combined estate is under $30 million. Exemption portability lets a surviving spouse claim the deceased spouse’s unused exemption by filing Form 706, which accomplishes the same tax outcome as a bypass trust without the administrative burden. Bypass trusts still make sense for blended families, asset protection, or estates well above $30 million, but they’re no longer standard equipment.
What is the 2026 annual gift tax exclusion?
The annual gift tax exclusion remains at $19,000 per recipient for 2026, the same as 2025. A married couple can jointly gift $38,000 per recipient per year without using any lifetime exemption. Gifts to a non-U.S.-citizen spouse have a separate annual exclusion of $194,000 in 2026.
Should I still fund an irrevocable trust if I’m under the exemption?
Usually no, for pure tax reasons, but trusts serve purposes beyond tax planning. Asset protection, creditor shielding, protection for vulnerable beneficiaries, and control over how heirs receive assets are all valid reasons to use an irrevocable trust regardless of the exemption. The change is simply that “remove assets from the taxable estate” is no longer a compelling reason for families under $30 million.
How often should I review my estate plan now?
Every three to five years, or whenever there’s a major life event or a major tax law change. The 2026 OBBBA changes are a clear review trigger. Plans drafted between 2018 and mid-2025 were built around assumptions that no longer hold, and sitting on an outdated plan is how families end up with the problems described above.
A Quick Word Before You Close This Tab
Rules of thumb only go so far. The seven clauses above are the most common ones made obsolete by the 2026 law, but the right fix for each one depends on your family, your assets, and what you actually want to happen. A formula that’s disastrous for one couple might be exactly right for another. If you’d like to walk through what’s in your current documents and what should change, 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.
