Why Old Trusts Could Cost Your Heirs More Than Estate Taxes

August 28, 2025

Back in 2001, the federal estate tax exemption was only $675,000, and anything above that could be taxed at rates up to 55%.

For federal employees with a family home, a decent TSP balance, and survivor benefits, hitting that threshold wasn’t hard.

Fast forward to today: the exemption is $13.99 million per person in 2025.

That shift has made estate tax planning irrelevant for most federal families.

But here’s the problem — trusts created in the low-exemption era can now hurt your heirs more than they help.

The Step-Up in Basis: The Rule That Saves Heirs Thousands

When property is inherited, its tax value resets to fair market value on the date of death.

  • A house bought for $100,000 that’s now worth $500,000 passes tax-free at $500,000.

  • Without the step-up, heirs could owe capital gains on the $400,000 growth.

Trusts like bypass or credit shelter trusts often block this benefit.

And in today’s world, that means heirs could face a bigger bill from capital gains than they ever would from estate tax.

Why Trusts Once Made Sense

In the early 2000s, these structures were smart. Couples used irrevocable or credit shelter trusts to:

  • Double their exemptions.

  • Move appreciating assets out of their taxable estate.

  • Protect family wealth from steep estate tax bills.

Today, those same strategies can backfire. What once shielded your estate from taxes may now trap your heirs with avoidable ones.

You should revisit your estate plan if:

  • It was written before 2010.

  • Its main goal was avoiding estate tax.

  • Real estate or investments are locked inside an irrevocable trust.

  • Your total estate is well below today’s $13.99M exemption.

What to Consider Now

Not every trust is harmful. Revocable living trusts still streamline probate and keep assets organized.

And some irrevocable structures offer asset protection that may still be worthwhile.

But if your estate plan is decades old, it’s time to:

  1. Review with a professional. An estate attorney or CFP® familiar with federal benefits can spot costly structures.

  2. Check your state rules. Some states impose estate or inheritance taxes with much lower exemptions.

  3. Update where possible. Revocable trusts can be restated, and in some cases even irrevocable trusts can be modified.

Bottom Line

For federal employees, the estate tax landscape has flipped.

The danger now isn’t paying federal estate tax — it’s losing the step-up in basis because of outdated planning.

Reviewing and modernizing your plan ensures your heirs inherit more of your TSP, pension value, and property—without extra tax baggage.

Best,
—FWR