I. Introduction

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Recent legislative developments - colloquially referred to as the “One Big Beautiful Bill” - have significantly reshaped the estate planning landscape. Chief among its changes is a historic increase in the unified credit (applicable exclusion amount), making the 2017 revisions permanent as to the estate, gift, and generation-skipping transfer (GST) tax exemption.  For 2024, the exemption is $13,610,000 and is set to increase to $15,000,000 per person (or $30,000,000for married couples).  While this expansion may appear purely beneficial, it has introduced unintended consequences, particularly with respect to irrevocable trusts holding highly appreciated assets.

For decades, wealthy individuals have used irrevocable trusts to remove appreciating assets from their estates and shelter them from estate taxes.  However, with the increased exemption, estate tax exposure for many families has become moot.  As such, many families - under the old paradigm of focusing on the estate tax – funded irrevocable trusts that now hold highly appreciated assets, while the total net worth of the family/individual is below the exemption amount (i.e., under $15M for individual or under $30M for married couple).

This scenario – a common one today – results in an unnecessary estate tax shelter while ignoring the benefits that could be achieved through a step-up in basis under IRC §1014.  That is, assets held in irrevocable trusts do not receive a step-up in basis at the settlor’s death.

This article explores the key issues and provides guidance on whether and how to revise your estate plan to adapt to this new reality.

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II. The Unified Credit and Why It Matters

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The unified credit—also called the estate and gift tax exemption—represents the cumulative amount of wealth an individual can transfer during life or at death without incurring transfer taxes.  Before the passage of the Big Beautiful Bill, the exemption was $13.61 million per person (2024). For 2025, the exemption is set to $15 million, effectively sheltering $30 million for married couples.

For many wealthy families, this means the combined value of all their assets (including investment accounts, real estate, business interests, and life insurance proceeds) may now fall below the taxable threshold. In practical terms, they no longer need to "remove" assets from their estates for the sole purpose of avoiding estate tax.

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III. Appreciated Assets in Irrevocable Trusts: The Hidden Cost

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Historically, estate planners encouraged clients to transfer appreciating assets into irrevocable trusts to shield future appreciation from estate tax. This strategy remains sound where the taxable estate exceeds the exemption. But when assets are moved outside of the estate (whether through lifetime gift or contribution to an irrevocable trust), they generally lose the opportunity for a step-up in basis at death.

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What Is a Step-Up in Basis?  

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A step-up in basis adjusts the tax basis of an asset to its fair market value at the date of death. For example, if a person bought a stock for $1 million and it’s worth $5 million at death, the basis of the stock" steps up" to its fair market value (as of the date of death) – i.e., to $5 million. As such, the recipient could sell it immediately with zero capital gains tax.  However, if that stock is owned in an irrevocable trust that is not included in the settlor’s taxable estate, the basis remains at $1 million, since the transfer did not occur “as a consequence of the donor’s death.” As such, if the trust sells the stock (after the settlor’s death), it would trigger a $4 million capital gain, resulting in a substantial tax liability - even if no estate tax is owed.

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Example Scenario.  A married (U.S. citizen) couple has a net worth of $22 million. Several years ago, they transferred $8 million of appreciated real estate into a irrevocable trust to remove future appreciation from their estate.  Now that their combined exemption is $30million, no estate tax would be due even if the property were held in their estate (i.e., in their personal name). But because the property sits in an irrevocable trust, outside of the settlor’s estate, it does not receive a step-up in basis. When the trust sells the property, it may incur significant capital gains tax - an entirely avoidable result under current law if properly addressed.

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IV. Strategies for Repositioning Irrevocable Trust Assets

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For those whose estates now fall below the new unified credit, it may be worth considering strategies to reinclude trust assets in the estate to obtain a step-up in basis. This may seem counterintuitive, but it’s an increasingly important tax-saving opportunity.

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Swap Power or Substitution Power.  Some irrevocable trusts give the grantor a “swap” power - typically under IRC §675(4)(C) - allowing the substitution of assets of equivalent value. If the trust holds low-basis assets, the grantor can substitute those for high-basis assets held personally. This brings the appreciated assets back into the estate and preserves the basis step-up.  Planning Tip: This power must be retained or reintroduced (if possible) before the grantor dies. The power should be exercised carefully, ideally with fiduciary consent and appropriate valuations.

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Triggering Estate Inclusion Deliberately.  Trusts can be modified - either through decanting or judicial reformation - to intentionally include assets in the grantor’s estate. Techniques include:

 

•             Adding general powers of appointment to a beneficiary;

•             Modifying trust provisions to intentionally cause estate inclusion under IRC                                            §§2036 or 2038;

•             Merging the trust into a new trust that accomplishes these objectives.

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Each of these approaches carries legal, fiduciary, and practical implications. Any modifications should be evaluated with legal counsel and a tax advisor.

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Distributions from Trusts.  Some irrevocable trusts permit discretionary distributions to beneficiaries.  If a trust can distribute appreciated property outright to the grantor (in rare cases) or to a spouse or descendant, and those recipients are expected to hold the assets until death, the property may receive a step-up in basis in that person's estate.  This strategy requires careful coordination with the family’s broader estate planning and financial goals, and consideration of creditor protection and divorce risk.

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V. Reviewing and Updating Your Estate Plan

 

Given the dramatic increase in the estate tax exemption, it’s time to review every component of your estate plan, including:

 

•             Irrevocable Trusts – Reevaluate whether old funding decisions are still optimal in              light              of the basis step-up tradeoff.

•             Revocable Trusts and Wills – Update dispositive provisions, tax clauses, and                                          formula bequests that may rely on outdated exemption amounts.

•             Powers of Attorney and Health Documents – Confirm they are current and legally                                  compliant.

•             Beneficiary Designations – Coordinate these with your overall estate plan to                                          avoid unintended results.

•             Gift Planning – Pause or revise large gift programs that may no longer be                                                necessary, especially if the assets are low-basis.

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VI. Final Thoughts

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The Big Beautiful Bill has expanded planning flexibility for many families. However, it also highlights a crucial tension between estate tax avoidance and income tax minimization. For years, families raced to move appreciating assets into irrevocable trusts to avoid estate tax. But now, in an era of expanded exemptions, the step-up in basis has taken on new significance.  In many cases, retaining appreciated assets in the estate - or repositioning them back into the estate - may now be the more tax-efficient option.

 

As always, estate planning is not static. It must evolve alongside the law, your family circumstances, and your long-term goals. A thoughtful review of your trust structures and asset placement in light of the new unified credit could save your heirs millions of dollars in unnecessary taxes.

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For help reviewing or updating your estate planning documents, contact our office.