In the summer of 2024, David and Carol Mercer drove to a financial planning meeting in McKinney they had been putting off for months. Their planner had been calling. There was something called the "estate tax cliff" coming in January 2026, and at $9.4 million the Mercers were squarely in the zone where it would hurt.
They'd been aware, in a vague way, that they had a trust. A thick binder had sat in a filing cabinet since 2008, when a now-retired attorney in Frisco had set it up for them. David was finishing a long career at Texas Instruments. Carol had spent thirty years as a principal in the Allen ISD. They had done what responsible people do — they had planned.
Then, on July 4, 2025, the One Big Beautiful Bill Act became law. The federal estate tax exemption was permanently raised to $15 million per person. The cliff that had been looming for eighteen months simply vanished. Their financial planner called to deliver the good news: "You're at $9.4 million. You're fine. You'll never owe estate tax. Relax."
They relaxed. They did not pull out the binder.
In October 2025, Carol mentioned the trust to an attorney at a seminar. The attorney asked a single question: What does your bypass trust formula say?
Carol found the binder. On page 14, the language read: "Upon the death of the first Grantor, the Trustee shall fund the Credit Shelter Trust with an amount equal to the maximum amount that can pass free of federal estate tax under applicable law at the time of such Grantor's death."
In 2008, that formula would have directed $2 million into the bypass trust and left the rest for Carol. That was the plan.
In 2026, that same formula directs up to $15 million into the bypass trust — more than David's entire estate. Every dollar he had built over forty years would flow into a trust Carol couldn't freely control, and that would pass to their children without a single cent of capital gains relief.
Congress had just saved the Mercers from the estate tax. Their 2008 trust document was about to cost their children over a million dollars in capital gains taxes they never needed to pay.
What Bypass Trusts Were Designed to Do
To understand what went wrong, it helps to understand what bypass trusts were designed to do — and when they were designed to do it.
For most of American tax history, the federal estate tax exemption was low. In 1987 it was $600,000. In 2001 it was $675,000. A married couple with even a modest estate could face substantial federal estate tax at the death of the second spouse if they didn't plan carefully.
The problem was structural. Under federal law, spouses can leave everything to each other completely free of estate tax — the unlimited marital deduction, codified at IRC § 2056. But if everything passes to the surviving spouse, the deceased spouse's exemption is wasted. The surviving spouse's estate can only shelter assets up to one exemption at death, not two.
Bypass trusts — also called credit shelter trusts or "B trusts" in AB trust arrangements — solved this problem. At the first spouse's death, assets up to the exemption amount were diverted into an irrevocable trust for the benefit of the surviving spouse. Those assets "bypassed" the surviving spouse's taxable estate. At the second death, they passed to the children without being counted again. The couple effectively used two exemptions instead of one.
For a couple in 1995 with $1.4 million and a $600,000 exemption, this planning was not optional — it was essential. Without it, a significant portion of their estate could be lost to a 55% federal tax rate on amounts above the exemption. With it, both exemptions were leveraged and the children inherited everything.
It was elegant. It was standard. It was in virtually every married couple's estate plan drafted between 1980 and 2012. And the formula language that made it work — "fund the bypass trust with the maximum amount that can pass free of estate tax" — made perfect sense when that amount was $600,000 or $1 million or even $5 million.
It makes no sense at $15 million.
Two Things Changed — and Only One of Them Made the Headlines
The first change was the exemption itself. The One Big Beautiful Bill Act, signed on July 4, 2025, permanently set the federal estate and gift tax exemption at $15 million per person, indexed for inflation beginning in 2027. For married couples, the combined protection is $30 million — and that number will only grow. For the vast majority of Texas families, federal estate tax exposure is now effectively zero for the foreseeable future. The TCJA sunset cliff, which our earlier article warned about extensively, never arrived. This is genuinely good news.
The second change is older and less celebrated. Beginning in 2011, Congress created the "portability election" — codified at IRC § 2010(c). Under this provision, when the first spouse dies, the surviving spouse can elect to preserve and carry forward the deceased spouse's unused estate tax exemption. This Deceased Spousal Unused Exclusion Amount, or DSUE, is then added to the surviving spouse's own exemption at their death.
In practical terms: if David dies in 2026 with $4.7 million and his exemption is $15 million, he has $10.3 million in unused exemption. Carol can elect to port that $10.3 million to her own estate. Her total protected amount at death becomes $25.3 million. There is no bypass trust required. Carol has full control over all assets. And when Carol dies, every asset in her estate receives a full step-up in income tax basis under IRC § 1014.
That last point is the one most families miss entirely.
The Step-Up in Basis Trap Hidden in Your Documents
Step-up in basis is one of the most powerful tax benefits in the American tax code, and one of the least discussed at the kitchen table. Under IRC § 1014, assets included in a decedent's gross estate receive a new cost basis equal to their fair market value on the date of death. Forty years of capital appreciation — the TI stock bought for $5 a share, the McKinney rental property purchased in 2002 — is effectively erased. The heirs can sell immediately and owe no capital gains tax on any of that appreciation.
Assets inside a bypass trust do not receive this treatment at the surviving spouse's death.
That is not a quirk or an oversight. It is the fundamental design of a bypass trust. The whole point is that bypass trust assets are not included in the surviving spouse's estate — they bypass it. And because they bypass it, they also bypass the step-up. The assets pass to the children at the original cost basis, not at the date-of-death value.
For a couple in 1995, this was an acceptable trade-off. They used the bypass trust to avoid a 55% estate tax rate on amounts above a $600,000 exemption. Losing some basis step-up was a reasonable cost for avoiding a six-figure tax bill.
For a couple in 2026 with a $9.4 million estate and a combined $30 million exemption? There is no estate tax to avoid. There is only the loss of the step-up.
Here is what that costs the Mercer family in concrete terms. David's bypass trust holds $4.7 million in assets with an aggregate cost basis of approximately $700,000 — largely low-basis TI stock accumulated over decades and a rental property in McKinney purchased in 2002. By the time Carol dies ten years later, those assets have grown to $6.2 million. Their children inherit from the bypass trust. The cost basis is still $700,000. The taxable gain is $5.5 million. At the combined federal long-term capital gains and net investment income tax rate of 23.8%, the tax bill is approximately $1.3 million.
If instead those assets had been in Carol's estate — because the couple had used a simpler structure relying on portability — the children would have received a step-up to $6.2 million at Carol's death. Capital gains owed: zero.
The bypass trust, designed to protect the Mercers from an estate tax they were never going to owe, is on track to cost their children $1.3 million.
How to Know Whether Your Trust Has This Problem
Pull your estate planning documents. Look for any of these phrases in your trust or will:
- "Maximum amount that can pass free of federal estate tax"
- "An amount equal to the applicable exemption amount"
- "The unified credit equivalent amount"
- "An amount equal to the basic exclusion amount under IRC § 2010"
- "The applicable exclusion amount in effect at the time of death"
Any of these formula-based provisions, left unamended, will now automatically capture up to $15 million at the first spouse's death. If your combined estate is less than $15 million, every asset flowing through the deceased spouse's estate goes into the bypass trust — not because anyone made that decision, but because a formula written for a $1 million exemption is now running against a $15 million one.
Documents drafted before 2011 are the highest-risk category, because they were drafted before portability existed and genuinely needed the bypass trust formula to maximize tax savings. Documents drafted between 2011 and 2017 may have been partially updated but often weren't, because the exemption was still high enough that the formula rarely triggered fully. Documents drafted between 2018 and 2024 may or may not have been revisited with the TCJA sunset in mind. Very few were updated with the OBBBA's $15 million permanent number in view.
If your trust was drafted more than five years ago and no attorney has reviewed the formula language since, the review is overdue.
The Fix — and Why It Usually Costs Less Than You Think
For most Texas couples, the solution is a trust amendment that either:
- Caps the bypass trust at a specific dollar amount — often $1 million to $3 million, enough to preserve some asset protection or generational-planning benefit while leaving the bulk of the estate available for the step-up at the second death; or
- Restructures the plan entirely around portability, eliminating the formula-based bypass trust and relying instead on the portability election under IRC § 2010(c), with outright or marital-trust transfers designed to maximize the step-up at the surviving spouse's death.
For estates significantly above $15 million per person, bypass trusts remain a useful tool — they provide creditor protection, lock in the first spouse's exemption independent of future law changes, and offer generation-skipping planning benefits. But that analysis should be made deliberately, based on the actual estate and the actual tax exposure, not inherited from a formula written twenty years ago.
One critical administrative note: the portability election requires filing a federal estate tax return (Form 706) within nine months of the first spouse's death, with a six-month extension available. No estate tax need be owed — the return is filed solely to preserve the DSUE. Under Rev. Proc. 2022-32, surviving spouses have up to five years from the date of death to make a late portability election. This window is valuable: many Texas families whose spouses died in recent years without filing Form 706 can still act to preserve the portability benefit. But the five-year window closes without notice, and once it does, the unused exemption is gone.
What Happened to the Mercers
Carol called us after that seminar. We reviewed the Mercer trust, confirmed the formula problem, and drafted a two-page amendment capping the bypass trust at $1.5 million — enough to anchor a modest asset-protection structure — with the remainder of David's estate passing to Carol outright. We also documented the portability election protocol so their executor would know to file Form 706 regardless of estate tax liability.
The amendment cost $600. The capital gains protection it establishes is worth, on the Mercers' current projections, between $900,000 and $1.3 million for their children — a generation-skipping tax saving that Congress never intended them to lose and that a single formula clause was quietly engineering.
The One Review Worth Scheduling This Month
The One Big Beautiful Bill Act was genuinely good news for Texas families. For the vast majority of North Texans — those with estates under $15 million per person — federal estate tax is no longer a practical concern. The cliff is gone. The panic can end.
But estate planning documents do not update themselves. A formula written in 2001, 2008, or 2014 that made perfect sense under the law of its time may now be running silently in the wrong direction — diverting assets into an irrevocable trust, stripping the step-up in basis, and delivering a capital gains bill to your children that no one ever intended and that could have been avoided entirely with a two-page amendment and a $600 attorney fee.
At WG Law, Carla Alston holds an LL.M. in Taxation from New York University School of Law — widely regarded as the most rigorous tax LL.M. program in the country — and has been practicing tax-smart estate planning in Texas for 39 years. She reviews bypass trust formula clauses, portability strategies, and basis planning as part of every estate plan review she conducts. If your trust was drafted more than three years ago and you have not had the formula language reviewed since the OBBBA, this is the review to schedule.
Contact WG Law at 214-250-4407 or request a consultation. We serve families in McKinney, Southlake, Frisco, Plano, Allen, Collin County, and across the greater DFW metroplex.
This article is for general informational purposes only and does not constitute legal advice. Estate planning and tax law are highly fact-specific. Please consult a licensed Texas estate planning attorney before making any changes to your estate plan.