Navigating the 2025 Tax Shift: Strategic Trust Revisions to Shield Wealth from Capital Gains and Estate Tax Risks

The 2025 tax landscape is reshaping the rules of the game for high-net-worth individuals and fiduciaries. With the IRS's 2023 rule change (Rev. Rul. 2023-2) and the One Big Beautiful Bill Act (OBBBA) of 2025, the stakes for estate and capital gains tax planning have never been higher. Irrevocable trusts, once a cornerstone of wealth preservation, now require a fresh look. Let's dissect what's at stake—and how to adapt.

The Step-Up in Basis Dilemma

Historically, assets in irrevocable grantor trusts benefited from a “step-up in basis” at the grantor's death, resetting the asset's tax value to its fair market price. This allowed beneficiaries to sell appreciated assets without triggering massive capital gains. But the IRS's 2023 ruling upended this assumption. Under Rev. Rul. 2023-2, assets in irrevocable grantor trusts (where the grantor retains income tax powers but not estate tax powers) no longer qualify for this step-up. The basis remains tied to the original cost, not the market value at death.

Example: A grantor places a $200,000 property into a trust that appreciates to $1 million by the time of their death. Without a step-up, the beneficiary selling it faces a $800,000 capital gain. At a 37% federal rate (plus state taxes), this could cost hundreds of thousands in taxes.

This change disproportionately impacts trusts holding long-term appreciating assets like real estate, art, or collectibles—exactly the types of assets often placed in irrevocable trusts for estate planning.

The 2025 Tax Code: A Double-Edged Sword

The OBBBA, signed in July 2025, introduced both opportunities and challenges. It permanently increased the federal estate and gift tax exemption to $15 million per individual (adjusted for inflation) and indexed it annually. For married couples, this creates a $30 million “umbrella” for tax-free transfers. Meanwhile, capital gains brackets for 2025 were slightly adjusted for inflation, with the 0% rate for long-term gains applying to incomes under $48,350 (single) or $96,700 (married filing jointly).

The OBBBA also extended TCJA-era tax brackets for trusts and estates, providing predictability for income distributions. However, the sunset of the high unified credit in 2025—projected to drop to $5.49 million—means the window to leverage the $15 million exemption is closing.

Strategic Revisions for 2025 and Beyond

Given these shifts, here's how to adjust irrevocable trusts to minimize exposure:

1. Reinstate Estate Inclusion via Trust Modifications
2. California's Probate Code allows trusts to be modified with court approval or mutual consent. By restructuring the trust to include assets in the grantor's taxable estate (e.g., by granting a power of appointment), the step-up in basis can be preserved.

3. Example: A trust with a “sprinkling power” letting the grantor direct asset distribution at death can trigger estate inclusion, qualifying for the step-up.

4. Leverage Powers of Appointment or Substitution

5. If a trust includes a power to substitute assets, the grantor can swap low-basis assets (e.g., appreciated real estate) for high-basis ones (e.g., cash) before death. This ensures the appreciated asset is included in the estate for tax purposes.

6. Decanting as a Solution

7. Decanting—transferring assets from one trust to another—can create a new trust with terms that include assets in the grantor's taxable estate. This is particularly useful for trusts with outdated language.

8. Rebalance Trust Assets to Lower-Tax Assets

9. Shift trust holdings to assets with lower capital gains rates, such as collectibles (28% max rate) or qualified small business stock (QSBS). The OBBBA's increased QSBS exclusion cap to $15 million (or 10x basis) makes this a compelling option.

10. Accelerate Gifting and Dynasty Trusts

11. With the $15 million exemption now permanent, use 2025 to fund dynasty trusts or generation-skipping trusts. These structures bypass estate and generation-skipping taxes while retaining GST exemptions.

The Cost of Inaction

Failing to act could leave beneficiaries with a tax bomb. For instance, a trust holding $1 million of appreciated real estate with a $200,000 basis could incur $300,000+ in taxes at a 30% combined rate. In high-tax states like New York or California, the burden is even heavier.

Final Thoughts: Plan Proactively, Not Reactively

The 2025 tax code is a mixed bag: it offers a generous exemption but removes a critical tax shield for trusts. The key is to act before the 2026 sunset of the $15 million exemption. Work with estate attorneys and tax advisors to:
- Audit existing trusts for compliance with Rev. Rul. 2023-2.
- Modify or decant trusts to include assets in the taxable estate.
- Diversify trust portfolios to reduce capital gains exposure.

In a world of shifting rules, adaptability is the ultimate asset. For high-net-worth individuals, the time to act is now—before the 2025 tax window closes.