Evaluating Old Irrevocable Trusts

Originally posted to WealthManagement.com

Many clients have old irrevocable trusts. Most seem to assume that “nothing has changed,” so that maintaining the status quo of their trusts is just fine. Because nothing needs to be done, clients often see no need to review the trust’s current relevance with their attorney. That presents a great value-added planning opportunity for wealth advisors and CPAs. And the opportunity is opened up by just asking a few simple questions: “Why did you create this trust?” and “What purpose does it serve now?” 

Nothing is the Same

Estate planning has undergone a dramatic shift following the passage of the One Big Beautiful Bill Act in 2025, which permanently raised the federal estate and gift tax exemption to $15 million per person on Jan. 1, 2026, with ongoing annual inflation adjustments. For years, advisors had been preparing for a steep drop in the exemption—a “sunset” that would have returned exemption levels to roughly $7 million per person. That change no longer exists. The exemption didn’t fall. It rose. For almost all taxpayers, avoiding estate tax is no longer relevant, but saving state or federal income taxes, or protecting assets, may be.  This new landscape has created more reasons than ever to re‑evaluate legacy trust planning structures drafted under outdated assumptions.

Trusts drafted decades ago were created in a very different tax world. For decades, planners focused on minimizing estate tax exposure when the exemption ranged from $600,000 to $5 million. To accomplish that, designs such as credit‑shelter trusts, A/B trusts and bypass structures became common. Some estimates suggest that there may be as many as 2 million such trusts. 

Now that the federal exemption is permanently set at $15 million per (although “permanent” in Washington-speak may mean permanent until a future administration changes it), many families who once needed these structures no longer do. Maintaining old trusts can create unintended problems, including loss of basis step‑up, higher income taxes inside non‑grantor trusts, mandatory distributions that undermine asset protection, inefficient state tax situs and governance structures that no longer fit the family.

Proactive Planning

Many older trusts,  particularly those designed for a lower‑exemption era, may now impose unnecessary tax complexity, administrative burdens or family‑governance constraints. Advisors increasingly find that the question isn’t whether a trust is irrevocable, but whether it remains aligned with the family’s needs, tax posture and multigenerational goals. If it isn’t, and many aren’t, then the questions are more proactive: “What can we do to improve the situation?” 

Rethink permitted distributions: The answer may range from something as simple as reading the trust and implementing planning options that have always existed but which weren’t pursued. It’s common for income to be distributed annually to a spouse when all descendants are named as beneficiaries. Simply redirecting distributions to lower tax bracket beneficiaries might provide immediate, simple and no-cost tax savings. There are a range of other options that might make sense, but they’re all identified by just asking “What can we do to improve this trust?”

State income tax: State fiduciary income taxation has become a major driver of trust modernization. Many states tax trusts based on the trustee’s residency, the trust’s administration location or the beneficiary’s residency. Older trusts drafted in Pennsylvania, New Jersey, New York or California may now be taxed in those states even if the family has moved. Steps like migrating the trust to a no‑tax state by changing trustees, dividing the trust and leaving assets connected to the high-tax state, and moving a divided trust with all other assets can meaningfully reduce long‑term tax drag. Even tinkering with asset location decisions may help reduce state income taxes.

Basis: Old irrevocable trusts may have been intended to avoid estate tax, which may no longer be relevant (but watch out for state estate taxes). Those same trusts might now result in a negative income tax. For example, a surviving spouse holds appreciated assets inside a credit‑shelter trust created in 2008. Because the assets are in a bypass trust, they don’t receive a second step‑up in basis on their death. When the trust assets are sold, the remainder beneficiaries may face significant capital‑gains taxes. Even though the exemption has risen instead of fallen, this structural issue remains. In some instances, distributing assets to the surviving spouse so that they’re included in their estate may permit a basis step-up that eliminates those capital gains without any estate tax cost. However, consider the terms of the trust and whether any liabilities might adversely affect those trust assets if distributed (for example, a new spouse, nursing home costs).

Improvement Mechanisms

Evaluate simpler options first, but don’t dismiss more costly or complex trust improvement mechanisms if the benefits outweigh the cost. There’s been a dramatic modernization of many state laws governing trusts. Many states now allow trust decanting, enabling trustees to pour assets into a newly drafted trust with updated terms. Many states also have broad nonjudicial settlement agreement statutes that allow modification without court involvement if the parties (beneficiaries, the grantor if alive, and the trustee) reach an agreement.

Advisor’s Role

Don’t assume that clients have met with their estate planner to review their trust in recent years or even decades. Proactively reviewing older trusts is essential. Advisors should gather original trust documents, trust amendments, actions that may have modified the trust, for example, by a trustee or trust protector), fiduciary tax returns and trust balance sheet information. Advisors can use AI to conduct a preliminary analysis to open a discussion with the client. While that AI analysis can’t be relied on, it may identify sufficient issues to motivate the client to pursue the review with an estate-planning attorney. Reviewing these with estate counsel may help assure that the client’s trust remains efficient and whether it should be modified, fully replaced or terminated. Families may be able to update older structures to better reflect current laws, financial goals and personal dynamics.