Do I Still Need a Bypass Trust in 2026

Emily called me last week, frantic. Her husband, David, had passed away unexpectedly, and she’d discovered the codicil to his trust – the one removing their bypass trust – was never properly witnessed. It was a simple oversight, a family friend signing instead of a disinterested party. Now, she’s facing potentially six figures in legal fees to try and validate the document, and even then, there’s no guarantee the court will accept it. The original bypass trust, established years ago, would have shielded a significant portion of their estate from federal estate tax. This isn’t about the money anymore; it’s about honoring David’s wishes and the needless stress she’s under.

As an estate planning attorney and CPA with over 35 years of experience, I’ve seen this scenario play out far too often. The question of whether a bypass trust – sometimes called an AB trust or credit shelter trust – is still necessary in 2026 is a common one, and the answer, as always, is “it depends.” But the landscape has shifted significantly, and many existing plans need revisiting.

For decades, bypass trusts were standard estate planning fare. The federal estate tax exemption was much lower, meaning a larger percentage of estates were subject to tax. A bypass trust allowed you to fund a trust with an amount equal to the then-current estate tax exemption, effectively removing that portion of your estate from potential taxation. The remaining assets passed to a marital trust, allowing the surviving spouse to use their exemption. This minimized overall estate tax liability.

However, the Tax Cuts and Jobs Act of 2017 dramatically increased the federal estate tax exemption. For 2024, it’s $13.61 million per individual. And while scheduled to revert to roughly half that amount in 2026 (adjusted for inflation, likely around $7 million), even that figure is high enough that fewer estates will actually owe federal estate tax. This has led many to question the continued utility of the bypass trust.

Is My Estate Big Enough to Worry About Estate Tax?

That’s the first question to ask. While the exemption is high, it’s crucial to consider all your assets: real estate, investments, retirement accounts, life insurance, and even digital assets. Don’t forget that the exemption is portable, meaning a surviving spouse can elect to use their deceased spouse’s unused exemption amount. This effectively doubles the exemption for married couples. But portability requires filing an estate tax return, even if no tax is due, a frequently overlooked step.

What About State Estate Taxes?

Even if your estate is below the federal exemption, you need to consider state estate taxes. California, for example, doesn’t have a state estate tax, but several other states do. If you live in a state with an estate or inheritance tax, a bypass trust may still be beneficial, regardless of federal exemption levels.

Beyond Tax Savings: Other Benefits of Bypass Trusts

While tax minimization is often the primary driver, bypass trusts offer other advantages. They can provide asset protection for beneficiaries, shielding assets from creditors or lawsuits. They can also be used to control the distribution of assets over time, ensuring responsible management and preventing impulsive spending. This is particularly useful for beneficiaries who may not be financially savvy or who struggle with addiction.

Creditor Protection: A well-drafted trust can protect assets from the beneficiaries’ creditors.
Spendthrift Provisions: These provisions prevent beneficiaries from assigning their trust interests to others, safeguarding assets from mismanagement.
Professional Asset Management: The trust can be managed by a professional trustee, ensuring prudent investment and distribution of funds.

The CPA Advantage: Step-Up in Basis and Valuation

As a CPA as well as an attorney, I always emphasize the importance of step-up in basis. Assets held in a bypass trust receive a step-up in basis to fair market value at the date of the grantor’s death. This means that when beneficiaries eventually sell those assets, they will only pay capital gains tax on the appreciation after the date of death. This can result in significant tax savings, far exceeding the benefits of a simple estate tax reduction. Furthermore, accurate valuation of assets within the trust is critical for both estate and gift tax purposes, a process where my CPA expertise is invaluable.

What About Disclaimers and Other Estate Planning Tools?

Instead of a bypass trust, some clients are exploring disclaimers or utilizing qualified personal residence trusts (QPRTs). Disclaimers allow a beneficiary to refuse an inheritance, passing it on to the next beneficiary in line. This can be a useful tool, but it requires careful planning and timing. QPRTs can remove a residence from your taxable estate, but they involve transferring ownership and can have complex tax implications.

What’s Changing in 2026?

The scheduled decrease in the federal estate tax exemption in 2026 will undoubtedly bring bypass trusts back into sharper focus. While fewer estates may be subject to tax, the risk will increase significantly. It’s crucial to review your estate plan now to determine if a bypass trust, or some other strategy, is appropriate for your situation. The impending changes also underscore the importance of accurate estate and gift tax valuations.

Remember Emily’s situation. A small oversight in the execution of a codicil created a world of pain and expense. Don’t let a similar fate befall your family. Regularly review your estate plan with qualified legal and tax professionals to ensure it reflects your current circumstances, goals, and the ever-changing tax laws.

As I’ve advised clients for over 35 years, proactive estate planning isn’t just about avoiding taxes; it’s about providing peace of mind and ensuring your wishes are carried out, even after you’re gone.

What standards do California judges use to determine a will’s true meaning?

In California, a last will and testament operates within a probate system that emphasizes intent, clarity, and procedural compliance. When properly drafted, a will does more than distribute property—it creates legally enforceable instructions that guide courts, fiduciaries, and beneficiaries through administration with fewer disputes and less uncertainty.

To create a valid document, you must ensure the signer has legal capacity, strictly follow California will rules, and ensure you are correctly identifying the will maker to prevent identity disputes.

For California residents, understanding how intent, authority, and compliance interact is one of the most effective ways to protect family harmony and estate integrity. A will that anticipates probate scrutiny is far more likely to be honored as written and far less likely to become the source of unnecessary conflict.

Resources for Legal Standards & Probate Procedure

• Escondido Local Rules: San Diego Superior Court – Probate Division
  Access the essential “Local Rules” (Division IV) effective January 1, 2026. This includes mandatory e-filing procedures, current Probate Examiner notes, and Local Rule 4.4.5 regarding remote appearance requirements (via MS Teams) for non-evidentiary hearings.
• Attorney Verification: State Bar of California
  The official regulatory body for California attorneys. Use this to verify a lawyer’s “Certified Specialist” status in Estate Planning or to access 2026 guidelines on the ethical handling of Client Trust Accounts (IOLTA).
• Self-Help & Forms: California Courts – Wills, Estates, and Probate
  The Judicial Council’s official portal. It includes the updated 2026 forms for the $208,850 personal property threshold and the $750,000 “Primary Residence” simplified transfer procedure (AB 2016).
• Federal Estate Tax: IRS Estate Tax Guidelines
  The authoritative federal resource for estate and gift tax filing. It reflects the 2026 “OBBBA” permanent exemption of $15 million per individual, replacing the previously scheduled Tax Cuts and Jobs Act (TCJA) sunset.