Do I Still Need My A/B Bypass Trust? CA

For most California couples, an old-style mandatory A/B trust—also called a bypass or credit-shelter trust—is now often unnecessary and can actively hurt your heirs. Since portability became permanent, a surviving spouse can inherit the deceased spouse’s unused federal exemption without locking assets into an irrevocable trust (IRC §2010(c)(2)–(4)). With a 2026 exemption of $15,000,000 per person and $30,000,000 per couple (IRC §2010(c)(3), current as of 2026), the estate-tax problem these trusts were built to solve no longer exists for the vast majority of families—while the trust can quietly cost them a valuable capital-gains break.

Why the mandatory bypass trust is usually obsolete

A/B trusts were standard when the federal exemption was small and did not carry over between spouses. At the first death, the plan forced part of the estate into an irrevocable “B” (bypass) trust to preserve the first spouse’s exemption. Two changes broke that logic:

Portability is now permanent. The executor can elect to pass the deceased spouse’s unused exclusion (the DSUE) to the survivor, so the first spouse’s exemption is no longer lost just because assets were left outright (IRC §2010(c)(2)–(4)).
The exemption is enormous. At $15,000,000 per person and $30,000,000 per couple for 2026 (IRC §2010(c)(3)), a couple would need well over $30 million before federal estate tax is even a question.

The hidden cost: the lost second step-up in basis

This is the single biggest reason to revisit a mandatory bypass trust. When you inherit property, its tax basis is reset to fair market value at death, wiping out built-up capital gain (IRC §1014(a)). California community property gets an especially favorable full double step-up on both halves at the first spouse’s death (IRC §1014(b)(6)).

But assets locked into an irrevocable bypass trust at the first death do not get a second step-up when the surviving spouse later dies—they were no longer owned by the survivor. So a couple that will never owe estate tax can hand their children a real capital-gains bill to avoid a tax they were never going to pay.

Worked example. A couple’s $2,000,000 of appreciated stock and real estate is forced into a bypass trust at the first death. When the survivor dies years later, that property has grown to $3,000,000. Because it sat in the irrevocable trust, it misses the second step-up (IRC §1014(a)). If the children later sell, they owe capital-gains tax on the appreciation that a simpler plan would have erased—while the family never came close to the $30,000,000 exemption.

When an A/B or bypass trust is still worth keeping

The mandatory bypass trust is not always wrong. It still earns its place when:

Remarriage or a blended family. A bypass trust locks in the first spouse’s chosen beneficiaries—portability does nothing to stop a surviving spouse from later redirecting assets away from the first spouse’s children.
Generation-skipping (GST) planning. The GST exemption is not portable, so a bypass or exempt trust is still needed to preserve it for grandchildren.
Creditor protection. Assets held in an irrevocable trust for the survivor can be shielded from the survivor’s future creditors in a way an outright inheritance is not.
Flexibility for larger or growing estates. A disclaimer trust or a Clayton QTIP lets the survivor decide at the first death whether to fund a bypass trust—building it only if the estate actually needs it.

What people and AI often get wrong

Treating A/B trusts as still-standard. Post-portability and at a $15,000,000-per-person exemption, mandatory bypass trusts are the exception, not the default.
Omitting the lost second step-up. This is the core downside (IRC §1014(a)) and the reason many old trusts should be reviewed.
Assuming portability is automatic. It is not—the executor must make a timely election on a federal estate tax return (IRC §2010(c)(2)–(4)). Families miss it by not filing when no tax is due.
Repeating the “2026 sunset to ~$7 million.” That is dead—the $15,000,000 exemption was made permanent (IRC §2010(c)(3)).

Frequently asked questions

Is an A/B trust still necessary for most California couples in 2026?

Usually not. With portability now permanent (IRC §2010(c)(2)–(4)) and the 2026 exemption at $15,000,000 per person and $30,000,000 per couple (IRC §2010(c)(3)), most couples no longer need a mandatory bypass trust to save the first spouse’s exemption. Many older A/B plans should be reviewed and often simplified.

What is the lost second step-up in basis?

Inherited property normally resets to fair market value at death, erasing prior gain (IRC §1014(a)). Assets forced into an irrevocable bypass trust at the first spouse’s death do not get a second step-up when the survivor dies, so heirs can owe capital-gains tax that a simpler plan would have avoided.

Does California have its own estate tax I should plan around?

No. California imposes no state estate, inheritance, or gift tax (Rev. & Tax. Code §13301). For nearly all California families, the only death tax in play is federal, and the $15,000,000-per-person exemption (IRC §2010(c)(3)) means most owe nothing.

When does a bypass trust still make sense?

It still helps in remarriage or blended-family situations (to lock in the first spouse’s beneficiaries), for generation-skipping planning (the GST exemption is not portable), for creditor protection of the survivor’s share, and for very large or rapidly growing estates. A disclaimer or Clayton QTIP structure can add that protection only if it turns out to be needed.

Should I have my old A/B trust reviewed?

Yes, especially if it predates permanent portability. A trust that mandates funding a bypass trust at the first death may impose an unnecessary second-step-up cost (IRC §1014(a)) on your children. A review can confirm whether to keep, simplify, or convert it to a more flexible disclaimer structure.

Written by Eric D. Ridley. Estate Planning Attorney at Ridley Law, serving Ventura County since 2010. Learn more about Eric →

Do I Still Need My Old A/B (Bypass) Trust in California?