Increasing your Income Tax Benefits

Is Your Old Trust Causing a New Tax Problem?

For many years, the primary goal of estate planning was to avoid the federal estate tax, often called the “death tax.” A decade ago, the exemption was much lower, and many middle-class families with significant assets had to plan carefully to avoid a large tax bill at death. A common tool for this was the “credit shelter” or “bypass” trust. Today, the financial landscape has completely changed, and these once-helpful trusts can now create a significant and unnecessary tax burden for your children.

The New Reality: A Shift from Estate Taxes to Income Taxes

The federal estate tax exemption has risen dramatically. For 2025, the exemption is over $13 million per person (and over $26 million for a married couple). This means that the vast majority of families will not owe any federal estate tax. As a result, the focus of modern estate planning has shifted from avoiding estate taxes to minimizing income taxes for beneficiaries, particularly capital gains taxes.

The Hidden Danger in Outdated Trusts

Herein lies the problem. Many families still have older credit shelter trusts that were designed for a different era. While effective at avoiding estate taxes, these trusts often have a major downside: they can prevent the assets inside them from receiving a “step-up in basis” at death.

The step-up in basis is a crucial tax benefit. It adjusts the cost basis of an inherited asset (like stocks or real estate) to its fair market value at the time of death. This means your beneficiary could sell the asset immediately and owe little to no capital gains tax. However, assets held in an old, irrevocable credit shelter trust may not get this step-up, potentially leaving your heirs with a massive, avoidable tax bill when they sell the inherited property.

Why a Review is Essential

If your trust is 10-15 years old, it was likely designed around tax laws that are no longer relevant to your family. It may be unnecessarily complex and could inadvertently create the very tax problems you were trying to avoid. A modern plan focuses on income tax savings and ensuring your beneficiaries inherit your assets in the most tax-efficient way possible.

A periodic review of your documents is a critical part of a successful financial strategy. An experienced elder law attorney can analyze your existing documents and recommend updates to ensure your comprehensive plan for your estate is aligned with current laws and your family’s best interests. Call our office at (919) 256-7000 to schedule a consultation.