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Trust Law/Level V · Tax and legacy/5.2 Annuity and unitrust structures/Lesson 7

When the tax law changes under a plan

How US federal transfer tax law has shifted since 2017, what the 2019 clawback regulations protect, and which tools give a trust room to adapt.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. For most families the cheapest response to a law change is none, since the 2026 basic exclusion of $15,000,000, indexed from 2027, exceeds their estate; older formula clauses can misdirect assets, so re-reading the will or trust after each change is worthwhile.
  2. Large lifetime gifts made under a higher exclusion stay protected if it later falls: Treas. Reg. §20.2010-1(c) lets the estate use the larger amount; only exclusion actually used counts, and 2022 proposed rules would exclude gifts with retained interests.
  3. Portability locks in a deceased spouse’s unused exclusion as it stood at death; an executor with no filing duty can still file Form 706 late under Rev. Proc. 2022-32, but only by the fifth anniversary of death.
  4. A qualified disclaimer under IRC §2518 redirects an inheritance with no gift tax; it must be written, irrevocable, made within 9 months of the transfer or of reaching 21, and made before accepting any benefit.
  5. Rather than going to court, state law may allow decanting or a nonjudicial settlement agreement under Uniform Trust Code §111 to update an irrevocable trust; neither may defeat a material purpose, and the IRS does not always follow such changes.

MaterialsA copy of the trust document you are reading, to find any amendment, protector or decanting clauseYour state’s statutes on decanting and nonjudicial settlement agreements, if it has themThe IRS ‘What’s new, estate and gift tax’ page, for the current year’s figures

Wonder

  1. What happens to large gifts already made if the basic exclusion is later lowered?
  2. Can an irrevocable trust be changed after it is funded, and by whom?
  3. How can a disclaimer change who receives property after a death?

Explore

  1. Transfer tax law changes often. The Tax Cuts and Jobs Act of 2017 doubled the basic exclusion from $5 million to $10 million, indexed for inflation, for 2018 through 2025 ($13,990,000 in 2025), after which it was scheduled to fall back. Public Law 119-21 of July 2025, known as the One Big Beautiful Bill Act and called the Working Families Tax Cuts on irs.gov, instead set the exclusion at $15,000,000 for 2026, indexed for inflation from 2027, with no scheduled end date. ‘Permanent’ here means only that no sunset is written in; a later Congress can change it.
  2. Plans made under one law can meet another. Before the 2025 law, many people made large gifts to use the higher exclusion before the scheduled drop. Older trusts and wills may split assets by formulas tied to the largest amount that can pass free of estate tax; when the exclusion rises, such a formula can send far more to one share, such as a bypass trust, and less to a spouse or other share than the settlor expected (lesson 3.3.1). Planners often review older documents after a law change for this reason.
  3. The clawback question asks whether gifts sheltered by a higher exclusion could be taxed at death if the exclusion later falls. Final regulations issued in November 2019 (T.D. 9884, Treas. Reg. §20.2010-1(c)) say no: the estate tax credit is figured using the larger of the exclusion applied to those gifts and the exclusion at death. Regulations proposed in April 2022 would deny this protection to certain gifts still included in the estate, such as gifts with retained interests; the published regulation still shows that exception as reserved. Exclusion that was never used is not protected.
  4. Irrevocable trusts can include tools for change. A trust protector is a person named in the document with the powers it grants, such as removing trustees, changing governing law or amending administrative terms; those powers and the protector’s duties depend on the document and state law. Decanting lets a trustee with discretion over principal move assets into a new trust with different terms, where state law or the document allows; the Uniform Law Commission approved a Uniform Trust Decanting Act in 2015. The tax effects of decanting are not fully settled, and the IRS asked for comments on them in Notice 2011-101.
  5. Powers of appointment let a named person, often a beneficiary, direct where trust property goes later. A general power, one exercisable in favour of the holder, their estate or their creditors, generally puts the property in the holder’s estate (IRC §2041), which some plans use deliberately to gain a stepped-up basis when the holder’s estate is below the exclusion; a limited power generally does not. A qualified disclaimer under IRC §2518 lets a person refuse an inheritance in writing, generally within 9 months and before accepting any benefit, so it passes to the next person in line without being a gift by them.
  6. Some trusts can also be changed by agreement. Under Uniform Trust Code §111, adopted in many states, interested persons can make a binding nonjudicial settlement agreement on matters a court could approve, but not one that violates a material purpose of the trust. Larger changes may need a court, and tax authorities do not always follow a change made under state law. Flexibility has costs: every power given to a protector or beneficiary can be misused or have tax effects of its own. This lesson describes these tools; it does not suggest which, if any, to include.

Key facts

  • The Tax Cuts and Jobs Act of 2017 doubled the basic exclusion to $10 million, indexed for inflation, for 2018 through 2025.
  • Public Law 119-21 (July 2025), the One Big Beautiful Bill Act, called the Working Families Tax Cuts on irs.gov, set a $15,000,000 exclusion for 2026, indexed from 2027.
  • T.D. 9884 (2019), Treas. Reg. §20.2010-1(c), lets an estate use the larger of the exclusion applied to lifetime gifts and the exclusion at death.
  • Regulations proposed in April 2022 would deny that protection to certain gifts included in the estate; the published regulation still reserves that exception.
  • Decanting lets a trustee move assets into a new trust with different terms where state law or the trust document allows.
  • A qualified disclaimer under IRC §2518 must be in writing, generally within 9 months, and made before any benefit is accepted.

Exercise nine, six, three, one

9CollectList up to 9 features of a trust or past gift you are reading about that a tax law change could affect (some plans have fewer), such as a formula clause, a large lifetime gift, a protector clause, a power of appointment or a decanting clause.
6ClusterSort them into 6 categories: completed gifts, formula clauses, protector powers, decanting and amendment, powers of appointment, and disclaimers.
3DistillReduce the 6 categories to 3 groups: features affected if the exclusion rose, features affected if it fell, and features you would ask an adviser about.
1CrystallizeWrite 1 sentence explaining, in your own words, why the 2019 clawback regulations matter only if the basic exclusion falls.

Fact check

Dates, figures and claims checked against the published sources listed below.

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