Revocable Trusts in Modern Estate Planning

Federal and Arizona Perspectives for Estates from one million to one billion

Executive summary

Congress ended the looming 2026 drop in the federal transfer tax exclusion. The fiscal year 2025 reconciliation law commonly referenced as Public Law 119 21 makes the basic exclusion amount fifteen million per person beginning in 2026 with indexing thereafter and it preserves portability. For 2025 the inflation adjusted exclusion is thirteen million nine hundred ninety thousand. Generation skipping exemption continues to track the basic exclusion. None of this disturbs the income tax step up in basis regime under section 1014. The Service’s 2023 ruling on irrevocable grantor trusts confirms that no automatic basis adjustment occurs at the grantor’s death unless the trust assets are included in the grantor’s gross estate. Arizona continues to impose no separate estate inheritance or gift tax while offering community property treatment that can deliver a double basis adjustment for married couples. IRS+5Congress+5Senate Finance Committee+5

Part I. What a revocable trust does and when to create it

A revocable trust is the default chassis for client facing planning in Arizona and in most jurisdictions. During life it centralizes title and allows incapacity management. At death it avoids local probate for assets properly funded to the trust or passing to it by beneficiary designation. After the death of one or both parents the same revocable trust can continue as a long term administrative platform that holds and distributes for descendants with spendthrift and governance features. None of these functions reduce federal transfer taxes by themselves. The trust is a will substitute and an administration tool first and a tax wrapper only when we add tax specific provisions such as credit shelter shares QTIP shares or postmortem disclaimer options.

Arizona law meshes well with revocable trusts. It follows the Uniform Trust Code and has no separate death tax. For large estates the absence of an Arizona estate or inheritance tax simplifies the analysis so the federal system and any other state where the family owns property drive the modeling. Arizona Department of Revenue

Part II. The current federal transfer tax landscape

Exclusion amounts and portability
• For decedents in 2025 the federal basic exclusion amount is thirteen million nine hundred ninety thousand. In 2026 the exclusion becomes fifteen million per person indexed thereafter rather than dropping by half. Portability remains available so a timely filed Form 706 can preserve a deceased spouse’s unused exclusion for the survivor. Legal Information Institute+3Tax News+3Congress+3

GST exemption
• Generation skipping exemption equals the basic exclusion amount by statute and therefore follows the move to fifteen million in 2026 with indexing after that. Legal Information Institute

Annual exclusion
• The annual gift exclusion for 2025 is nineteen thousand per donee. Tax News

Arizona overlay
• Arizona imposes no state level estate inheritance or gift tax and repealed its former pick up tax. Be sure to check non Arizona real or tangible property for exposure to another state’s death tax. Arizona Department of Revenue

Part III. Basis planning is now the main lever

General rule at death
Property acquired from a decedent generally takes fair market value basis at the date of death or alternate valuation date. In community property states including Arizona both halves of community property usually receive a full basis adjustment at the first spouse’s death if the property is community property at that time. See section 1014 and section 1014 b 6 and confirm with Publication 555. Legal Information Institute+1

Irrevocable grantor trusts after Revenue Ruling 2023 2
The Service held that assets owned by an irrevocable grantor trust do not obtain a basis adjustment at the grantor’s death if those assets are not included in the grantor’s gross estate. In other words grantor trust status alone does not secure a basis step up. This ruling pushed planners to add inclusion toggles when the client’s wealth trajectory shifts from transfer tax exposure toward income tax efficiency. IRS

Techniques that can produce estate inclusion when desired
• A formula testamentary general power of appointment for a child or for a surviving spouse that is limited by a cap to avoid federal estate tax for that holder and drafted to fit section 2041 and the regulations. Property subject to a true general power that causes inclusion will normally qualify for a basis adjustment. Legal Information Institute+2GovInfo+2
• A swap or substitution power to move low basis assets back into the grantor’s estate before death where the trust is otherwise excluded. Coordinate with fiduciary duty standards and any state trust law limitations. IRS
• A QTIP structure which by definition produces inclusion in the surviving spouse’s estate with a basis reset at that time while enjoying the marital deduction at the first death. Legal Information Institute

Techniques that block or reduce basis step up
• Classic credit shelter shares that remain outside the survivor’s gross estate will not step up again at the second death even though they may have stepped up at the first death if funded with appreciated assets. The single step up may still be optimal when transfer tax is the binding constraint or where creditor protection or dynasty objectives dominate. Beacon Pointe Advisors

Part IV. Building revocable trusts around post death choices

Modern revocable trusts should present choices at the first death so the fiduciary can match structure to values and tax constraints in real time.

Portability only default
A simple survivor’s trust with full QTIP eligible property and a mandatory portability filing preserves the DSUE amount and keeps all basis planning options open. Coordinate return filing even for non taxable estates and rely on the five year relief procedure if a filing is missed. Legal Information Institute+1

Disclaimer driven funding
A disclaimer clause that sends disclaimed assets to a credit shelter share gives the survivor nine months to test markets and update tax projections. Draft to meet section 2518 and the regulations including the no acceptance of benefits rule and the no direction of remainders rule. Use separate titles and separate accounts to facilitate partial disclaimers. Legal Information Institute+1

QTIP with reverse QTIP for GST
For families targeting multi generation protection, a QTIP election at the first death combined with a reverse QTIP election can align GST allocations while still delivering a basis reset at the second death. Cite section 2056 b 7 and related regulations for the marital deduction and coordinate GST elections on the return. Legal Information Institute

Part V. Wealth band guidance from one million to one billion

One to five million
Objectives are probate avoidance family governance and income tax efficiency. Most couples can use portability only planning. Confirm community characterization for Arizona couples to capture the double basis adjustment on first death. Use beneficiary designations to funnel large IRAs directly and plan for income taxation of inherited retirement interests. IRS

Five to fifteen million
Model the survivor’s net worth against the fifteen million exclusion effective in 2026. A disclaimer pathway into a credit shelter share may hedge against rapid growth while allowing all basis step up tools if the disclaimer is not exercised. Keep the Form 706 on the task list even if no transfer tax is due. Senate Finance Committee+1

Fifteen to fifty million
Now transfer taxes can bind even under the new law. Blend lifetime exclusion gifts with basis management. For gifts consider GRATs for concentrated low dividend positions and sales to intentionally defective grantor trusts with valuation support and proper seed capital. Maintain a robust power to substitute to swap in low basis assets later. Evaluate whether a partial QTIP at the first death improves the family’s second step up position without triggering estate tax at that time. Legal Information Institute+1

Fifty to two hundred fifty million
Layer structures. Family limited partnerships or LLCs can deliver control separation and discounting benefits, but avoid deathbed formation and retain no rights that trigger section 2036. Stress test for governance, business purpose, and outside assets for living expenses. Consciously allocate GST exemption to dynasty trusts at either spouse’s death mindful that GST again equals the basic exclusion amount going forward. Use CRTs to diversify low basis blocks while deferring gain and securing an income tax deduction. Legal Information Institute+3Bessemer Trust+3KPMG+3

Two hundred fifty million to one billion
Expect multi jurisdiction assets and charitable endowment goals. Tighten fiduciary risk controls. Consider private trust companies, directed trust models, and large dollar philanthropy using CLATs and CRTs integrated with a family foundation or DAF. Coordinate closely with corporate and cross border counsel when any non U S exposure exists. Legal Information Institute+1

Part VI. Arizona specific opportunities and cautions

Community property and basis
Arizona community property offers a powerful basis adjustment on the first death. Confirm title and characterization in the trust and ancillary real estate documents so that community property remains community through the first death. Section 1014 b 6 and Publication 555 are the key federal anchors. IRS

Dynasty trust duration
Arizona’s version of the rule against perpetuities includes a five hundred year vesting period for many trusts, but the Arizona Attorney General has opined that key parts of A R S section 14 2901 A are likely unconstitutional in light of the state constitution’s prohibition on perpetuities. Until courts resolve this, draft with flexible administrative powers and consider moving situs if multigenerational duration is mission critical. Arizona Legislature

No Arizona death tax
The Arizona Department of Revenue publishes that Arizona has no separate estate or inheritance tax and that the prior regime was repealed. Planning should nevertheless monitor exposure in other states for real or tangible property. Arizona Department of Revenue

Part VII. Putting basis planning into the documents

For married clients

1. Title assets to preserve community status where appropriate and keep clean records for reimbursement and tracing.

2. Include a portability only default with a required Form 706 filing, even if small, to preserve DSUE. Include administrative language that authorizes payment of return preparers and appraisers. Legal Information Institute

3. Add a disclaimer funded credit shelter share as an elective path. Confirm section 2518 compliance with a nine month clock and no acceptance of benefits. eCFR

4. Add a QTIP pathway and allow partial elections to target the survivor’s desired gross estate for a second basis reset without inviting tax. Legal Information Institute

For descendants after both parents’ deaths

1. Use long term trusts with spendthrift protection and independent distribution trustees.

2. Add a formula general power toggle for adult beneficiaries to allow limited inclusion when income tax benefits outweigh transfer tax cost. Coordinate with section 2041 definitions and state law creditor exposure. Legal Information Institute

3. Preserve a fiduciary swap power over grantor trusts so low basis assets can be moved back into a taxable estate before an anticipated death. IRS

Language and process notes
• Keep the substitution power subject to fiduciary safeguards and an equivalent value standard.
• Expressly allow decanting or nonjudicial settlement agreements where permitted.
• Calendar a living balance sheet review at least annually for families above ten million and at every major liquidity event.

Part VIII. Advanced structures to transfer wealth while managing basis

Grantor retained annuity trusts
GRATs are effective for volatile or appreciating assets. They rely on section 2702 and the zero valuation rule. Do not commingle assets with personal use or control. A series of short GRATs can capture bursts of appreciation. GRAT assets included in the survivor’s estate will step up then. Legal Information Institute+1

Sales to intentionally defective grantor trusts
Sales to IDGTs can shift future appreciation with minimal gift use when supported by valuation opinions and adequate seed capital. Income tax rules treat the sale as ignored between the grantor and the trust under Revenue Ruling 85 13, but that does not produce a basis step up by itself. Add a path to inclusion later if income tax savings will dominate. Planned Gift Design Services

Family limited partnerships and section 2036
Discounts remain available where facts support them, but deathbed formations, retained control, and circular cash flows risk inclusion under section 2036. Most failures are avoidable with early action, clean distributions, and a consistent business purpose. Bessemer Trust+1

Irrevocable life insurance trusts
Use ILITs to keep death benefit outside the estate. Section 2042 brings proceeds back if the insured retains incidents of ownership or if the estate is the beneficiary. Watch the three year pullback rule for policy transfers. Legal Information Institute

Charitable remainder and lead strategies
CRTs can eliminate immediate capital gain on a concentrated low basis position and provide an income stream with a charitable deduction under section 664 and section 170. Lead trusts can pair with dynasty GST planning in the current high exemption environment. Legal Information Institute+1

Part IX. Postmortem toolkit

1. File portability on time using Form 706 even if no tax is due. Use the simplified five year relief procedure when appropriate. IRS

2. Consider qualified disclaimers to steer assets into a credit shelter or GST efficient share. Track the nine month deadline and do not accept benefits before disclaiming. eCFR

3. Confirm community status and gather date of death appraisals so the basis file is defensible. Publication 555 provides high level federal guidance on community property treatment. IRS

Part X. Putting it all together

With the fifteen million basic exclusion starting in 2026 and GST tracking that amount, most Arizona families under that mark can safely prioritize basis planning and administrative simplicity. Revocable trusts with portability defaults, disclaimer options, and QTIP flexibility create a clean runway. For families above the new threshold, lifetime shifting through GRATs, IDGT sales, and dynasty trusts still matters, but do not give away step up opportunities casually. Use inclusion toggles, substitution powers, and selective QTIP elections to keep basis management squarely in play. The 2025 law gives us a wide and stable lane. The best designs place basis control and transfer tax control on equal footing and postpone the final choice until you have real facts at the first or second death. Congress+1

Primary sources

1. Public Law 119 21 fiscal year 2025 reconciliation law Congressional Research Service section by section summary including Title VII section 70106 extension and enhancement of increased estate and gift tax exemption amounts. Congress

2. Senate Finance Committee Title VII section by section explanation stating that the exemption is permanently increased to fifteen million per decedent for 2026 and beyond with inflation indexing after 2026. Senate Finance Committee

3. Internal Revenue Code section 2010 basic exclusion and portability and Treasury Regulations sections 20.2010 2 and 20.2010 3 portability rules. Legal Information Institute+1

4. IRS Revenue Procedure 2022 32 simplified method for late portability filings within five years of death. IRS

5. IRS annual inflation adjustments for 2025 confirming a thirteen million nine hundred ninety thousand basic exclusion and a nineteen thousand annual exclusion. Tax News

6. Internal Revenue Code section 2631 c confirming that GST exemption equals the basic exclusion amount. Legal Information Institute

7. Internal Revenue Code section 1014 and section 1014 b 6 basis rules and community property double adjustment and IRS Publication 555 Community Property. Legal Information Institute+1

8. Revenue Ruling 2023 2 confirming no basis adjustment for assets of an irrevocable grantor trust that are not included in the grantor’s estate. IRS

9. Revenue Ruling 85 13 disregarding sales between a grantor and a grantor trust for income tax purposes. Planned Gift Design Services

10. Internal Revenue Code section 2702 and Treasury Regulation section 25.2702 1 GRAT valuation rules. Legal Information Institute+1

11. Internal Revenue Code section 2056 b 7 and related regulations for QTIP planning and section 2056A for QDOTs. Legal Information Institute+1

12. Internal Revenue Code section 2042 and Treasury Regulation section 20.2042 1 life insurance inclusion rules. Legal Information Institute

13. Treasury Regulations and Code sections governing disclaimers section 2518 and sections 25.2518 1 and 25.2518 2. Legal Information Institute+1

14. Arizona Revised Statutes section 14 2901 and Arizona Attorney General Opinion I18 006 regarding perpetuities and the five hundred year period. Arizona Legislature

15. Arizona Department of Revenue Publication 10 stating that Arizona imposes no estate or inheritance tax. Arizona Department of Revenue

Secondary sources

1. Goodwin alert on the 2025 reconciliation act’s estate and GST changes. Goodwin Law

2. Frost Brown Todd overview of the permanent increase and indexing reset. Frost Brown Todd

3. Evans Legal note tracking the fifteen million change and planning implications for 2025 gifting. resources.evans-legal.com

4. The Tax Adviser coverage of community property basis issues and of Revenue Ruling 2023 2. The Tax Adviser+1

5. Bessemer Trust summary of Estate of Powell under section 2036. Bessemer Trust

Other references for deeper study

1. Heckerling Institute proceedings recent years on portability disclaimer planning powers of appointment and grantor trust toggles.

2. Bloomberg BNA Tax Management Portfolios including Estate Tax Credits and Computations GST Tax and sections 2701 to 2704.

3. ACTEC Commentaries on the Model Rules focusing on fiduciary powers decanting and directed trust governance.

4. Selected case law on family limited partnerships including Estate of Strangi and Estate of Powell for section 2036 analysis. FindLaw Case Law+1

Practical checklists you can drop into your file

At engagement
• Confirm community versus separate property classifications for all major assets.
• Inventory low basis positions and illiquid interests and note where a second basis reset would be valuable.
• For couples decide whether portability only with QTIP and disclaimer backstops covers foreseeable tax and family risks.

Before first death
• Refresh valuations and confirm beneficiary designations for retirement plans and life insurance.
• For clients with excluded grantor trusts consider swapping low basis assets back to the grantor. Document valuations and consideration. Planned Gift Design Services

At first death
• Order appraisals quickly to build the basis file.
• Calendar the portability return and reverse QTIP choices.
• Revisit whether a disclaimer into a credit shelter share or a partial QTIP is optimal given the survivor’s balance sheet and the fifteen million regime. Senate Finance Committee

At second death or child’s death where inclusion toggles exist
• Decide whether to exercise a formula general power of appointment to trigger inclusion and basis adjustment on selected assets. Coordinate creditor exposure and tax caps. Legal Information Institute

Disclaimer:
The information provided in this post is for educational and general informational purposes only and does not constitute legal, tax, financial, or other professional advice. Laws, regulations, and interpretations are subject to change frequently and may vary by jurisdiction. You should not rely solely on this information when making decisions affecting your personal circumstances. Please consult with a qualified attorney, tax advisor, or financial professional for advice specific to your situation. The transmission or receipt of this information does not create an attorney-client relationship or any other professional relationship. This post may be considered advertising under applicable state laws.