When Congress permanently locked the federal estate and gift tax exemption at $15 million per person last July, most trustees nodded and moved on. That’s the problem.
The exemption changed. Your trust documents probably didn’t. And the gap between what your trust was written to do and what it should do now is growing every day.
Here’s why every trust created before 2025 needs a review, what specifically breaks when exemption thresholds shift, and the checklist for making sure you don’t get caught on the wrong side of stale documents.
What actually changed
The One Big Beautiful Bill Act, signed July 4, 2025, did three things that affect existing trusts:
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Set the federal estate and gift tax exemption at $15 million per individual ($30 million per couple), with inflation adjustments starting in 2027. The old threshold was roughly $13.61 million.
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Changed charitable deduction rules — a 0.5% AGI floor now applies for itemizers, and a flat $1,000 deduction for non-itemizers. Trusts with charitable giving strategies built around the old rules may be leaving money on the table or failing to meet new thresholds.
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Mandated electronic payment for estate and gift taxes through EFTPS, effective September 30, 2025. If your trust’s payment procedures still reference check payments, they’re out of date.
These aren’t theoretical changes. They hit the mechanical instructions embedded in trust documents — formula clauses, distribution triggers, tax allocation provisions, and funding formulas.
The formula problem: when math turns against you
This is where most trustees get caught. Trust documents written between 2018 and 2024 were often drafted around the then-current exemption — $5 million, $7 million, $11.7 million, $12.92 million. The specific number matters because many trusts use formula clauses tied to the exemption amount.
A typical formula clause reads something like: “The trustee shall distribute to the survivor the maximum amount that can pass free of federal estate tax, using the applicable exclusion amount under IRC §2010.”
When the exemption was $5 million, this formula created a specific funding result. At $15 million, the same formula produces a completely different distribution — potentially leaving far more (or less) in the trust than the settlor intended.
This isn’t a paperwork issue. It’s a beneficiary impact issue. A trust designed to maximize the exemption at $5M may now be over-funding the survivor’s share and under-funding the bypass trust, or vice versa. The people who lose money from this mismatch are the beneficiaries — and the trustee who failed to catch it is the one who gets surcharged.
Sources from Seyfarth and DRM both flagged this exact risk in their 2026 trust and estate planning updates. Seyfarth’s 2026 analysis specifically notes that trusts with exemption-based formula provisions “require immediate review” given the permanent threshold change.
The charitable deduction shift
Trusts with charitable giving components face a separate problem. Under the old rules, charitable deductions from trusts faced no AGI floor — the deduction flowed through relatively cleanly. The new 0.5% AGI floor means that some charitable distributions that previously generated full deductions now generate partial deductions or no deduction at all.
For trusts designed around charitable remainder or charitable lead structures, this alters the tax calculus. The income stream the trust was designed to produce may no longer match the actual after-tax result. Trustees have a duty to review and adjust — continuing to run a trust on autopilot when the tax regime has changed is exactly the kind of “governance decay” that courts look for when assessing breach of fiduciary duty.
Cannon Financial’s 2026 tax law update specifically flags this as a client conversation that advisors need to be proactively initiating — not waiting for beneficiaries to notice a discrepancy.
The stale trust problem is massive in scale
This isn’t a niche issue. The federal estate tax exemption sat between $5 million and $7 million from 2011 to 2018. During that window, millions of revocable and irrevocable trusts were created. Many of those trusts:
- Contain formula clauses referencing the “applicable exclusion amount” without specifying a fixed dollar amount
- Were funded to the maximum exemption, leaving very little in the residual trust
- Include tax allocation provisions that assumed a different exemption landscape
- Have charitable provisions designed for the pre-2025 deduction regime
Seyfarth, DRM, and Cannon Financial all independently identified this review wave in their 2026 guidance. DRM’s 2026 law changes overview calls it a “critical window” for trust review, noting that the gap between old trust documents and the current exemption environment creates both risk and opportunity.
The trustee’s duty to review
Here’s the part that should get every trustee’s attention: failing to review a trust after a material change in tax law is itself a potential breach of fiduciary duty.
The Uniform Trust Code requires trustees to administer the trust in accordance with its terms and purposes. When the legal and tax environment shifts significantly, a trustee who does nothing — who simply continues administering a trust based on assumptions that no longer hold — is failing the duty of care.
Courts have been increasingly willing to hold trustees accountable for governance failures. The alter ego doctrine is expanding, with more jurisdictions willing to look past the trust form when formalities aren’t maintained. The same principle applies here: if you could have known that your trust documents were stale, and you didn’t act, that’s a governance failure with your name on it.
As Hull & Hull’s 2026 analysis of alter ego doctrine notes, courts are scrutinizing whether trustees treated trust formalities as optional. Running a trust on outdated formulas is exactly the kind of formality failure that weakens your legal shield.
The review checklist
If you’re a trustee on any trust created before July 2025, here’s what you need to check:
1. Formula clauses. Find every provision that references the “applicable exclusion amount,” “unified credit,” “exemption equivalent,” or IRC §2010. Calculate what the formula produces at $15M vs. what the settlor likely intended. If there’s a meaningful gap, you need to consult with the drafting attorney.
2. Funding levels. If the trust was originally funded to maximize the old exemption, the current asset level may be mismatched to the trust’s purpose. Review whether distributions, investment strategy, and reserve levels still make sense.
3. Charitable provisions. Check charitable remainder and lead trust calculations against the new 0.5% AGI floor. Recalculate the after-tax income stream. If it no longer matches the intended result, the trust may need to be amended or the charitable strategy adjusted.
4. Tax allocation provisions. Tax allocation clauses determine who pays income tax on trust earnings. When exemption levels change, the economic impact of these provisions changes too. A clause that was fair at a $5M exemption may be punitive at $15M.
5. Distribution standards. Some trusts tie distribution standards to net income or tax-adjusted income. If the tax regime has shifted, the practical meaning of those distribution standards shifts with it. Make sure the trust is distributing in a way that matches the current provisions.
6. Payment procedures. Update any references to check-based tax payments to reflect the EFTPS requirement effective September 2025.
7. Beneficiary communication. If your review reveals that the trust’s operations need to change, communicate that to beneficiaries before you make changes. Courts favor trustees who keep beneficiaries informed.
8. Document the review itself. The fact that you conducted the review, what you found, and what you decided to do (or not do, with reasoning) should be documented in the trust’s governance records. This documentation is your defense if anyone later questions whether you fulfilled your duty.
Why this is urgent right now
Two forces make this a right-now problem, not a next-quarter problem.
First, IRS audit scrutiny on trusts is escalating. The IRS is deploying AI-driven Discriminant Function analysis to flag statistically anomalous trust returns. Trusts with mismatched income, deductions, or tax positions are getting pulled for review. A trust still operating on stale exemption assumptions is exactly the kind of anomaly that triggers a look.
As Infinium Advisors notes in their 2026 guidance, the IRS now describes “comprehensive and organized records” as a compliance differentiator — meaning that the absence of organized, current documentation is itself a red flag.
Second, the legal environment for trustees is getting less forgiving. The alter ego doctrine is expanding. Courts in multiple jurisdictions are willing to pierce trust protections when formalities aren’t maintained. The $15M exemption change is a material legal shift. Ignoring it is the kind of inaction that plaintiffs’ attorneys point to when arguing that a trustee treated the trust as optional.
What governance software changes about this review
None of this is easy if you’re tracking trust compliance on spreadsheets and file cabinets. The review checklist above requires you to:
- Locate specific provisions across potentially dozens of trust documents
- Recalculate formulas against current law
- Compare intended vs. actual trust behavior
- Document the review process and outcomes
- Set reminders for the next review cycle
That’s a governance workflow — not a one-time project. The exemption will adjust for inflation starting in 2027. Charitable deduction rules may shift again. Regulatory pressure is intensifying, not decreasing.
TrustOffice gives you the system to run this review process now and keep it running. Audit-ready records. Formula change tracking. Beneficiary communication logs. Review cycle management. Everything a court or the IRS would look for to confirm you took your duty seriously.
Run your trust review at app.trustoffice.app.
