By Boyd & Boyd, P.C. · Originally published 2026-02-28 · Revised October 4, 2026
Planning for the Wrong Tax: How Credit Shelter Trusts Can Affect the Second Step-Up
Reducing Estate Taxes and preserving a future basis adjustment can pull a plan in different directions. Compare the family's potential total tax cost. Paying Estate Tax is not itself a prerequisite for a basis adjustment.
What Did the Tax Saving Trade Away?
A plan may shelter assets from a surviving spouse's estate while changing whether those assets qualify for another basis adjustment at that spouse's death. That does not make a credit shelter Trust wrong. It means the estate-tax result should be considered alongside the possible capital-gains result.
Understand the Two Tax Questions
Estate Tax concerns the transfer at death. Capital gains tax can arise when inherited property is later sold. The IRS explains that inherited property's basis is generally its fair market value at death, subject to exceptions and alternate valuation rules. A lower future taxable gain can matter even when no federal estate tax is due.
Look at the Actual Trust
Many bypass Trusts are intended to keep assets outside the survivor's taxable estate. Whether a later basis adjustment is available depends on the property, retained powers, Trust terms, and applicable tax rules. Grantor-trust status for income tax purposes alone does not establish entitlement to a death-time basis adjustment.
Compare the Choices at the Right Time
Consider likely appreciation, the survivor's circumstances, anticipated sales, state and federal Estate Taxes, and the family's goals. Disclaimer planning may create a decision point after the first death, but qualified disclaimers have strict requirements and deadlines. Do not assume a survivor can undo an accepted inheritance whenever convenient.
Ask for the Whole Tax Picture
The useful question is what the family may keep after both kinds of tax under plausible outcomes. Use the Tax Time Bomb slides as an introduction, then discuss the assets and Trust provisions that drive your own result.
Sources and related reading
Make Your Next Question a Better One.
Get the August 2025 Is Your Estate Plan a Tax Time Bomb? seminar slides. Use them to prepare questions; current advice depends on your circumstances.
General educational information. State laws and tax rules vary. Representation requires a separate engagement with Boyd & Boyd, P.C.
