Formula clauses under OBBBA fund wrong trusts

The formula in a trust document signed in 2004 had a simple job: move $1.5 million into the family trust and leave the rest to the marital trust. Executed today, that same clause moves $15 million, and in a $12 million estate it moves the entire estate before the marital trust sees a dollar. WealthManagement.com reports that most estate plans written before this year with a formula funding clause are now doing something their authors never intended.

Signed in July 2025, the One Big Beautiful Bill Act set the federal estate, gift and generation-skipping transfer tax exemption permanently at $15 million for an individual and $30 million for a married couple, effective Jan. 1, 2026. Because 2026 is the first year those figures actually govern, the year-end review season now under way is the last comfortable window for advisors to catch the consequences while the client who can fix them is still alive.

That new baseline puts the standard marital-and-bypass structure at risk, in which the document tells the trustee to fund the family, or credit shelter, trust with the largest amount that can pass free of federal estate tax and then pour the balance into a marital trust for the surviving spouse. In the report's 2004 example, the formula moved $1.5 million on signing; the identical formula now moves ten times that amount. No lawyer changed the language. The statute did.

Run that formula against a $12 million estate and the marital trust receives nothing. If the family trust is fully discretionary for the surviving spouse and children, the report observes, the outcome is awkward but workable; if the remainder beneficiaries are children from a first marriage and the survivor is a second spouse, the decedent has disinherited the individual the document was designed to protect. That is not a tax problem; it is a family problem created by tax math.

The same fixed exemption reaches into generation-skipping planning, because the GST exemption tracks the basic exclusion amount and so now sits at the same level, and it is still not portable between spouses: if the first spouse to die does not use it, it is gone. Formulas that carve out the settlor's remaining GST exemption for a dynasty trust were built for smaller exemption figures, and they now push far larger amounts into those trusts than the drafter had in mind.

The reverse QTIP election needs its own audit, because it treats the first spouse to die as the transferor for GST purposes, allowing that spouse's exemption to apply to a marital trust, and it works alongside the inclusion ratio, the fraction that measures how much of the trust remains exposed to GST tax, both calibrated to the old exemption numbers. The report warns that this language will not survive a glance at the end of a marital formula review; the advisor should confirm the election still produces the zero inclusion ratio the drafter intended.

The quietest problem is income-tax basis: for a larger number of families, the bypass trust now costs more in forfeited basis than it saves in estate tax, according to the report. The trade-off does not announce itself when the trust is funded; it shows up later, when an heir sells an asset and discovers the tax cost of a formula that no one re-examined.

For many advisory firms, the year-end estate review has been a ritual of updating beneficiary forms, confirming asset titling and checking the gifting calendar. OBBBA makes that ritual substantive, because a reviewer who re-runs a formula and reports the result gives false comfort: the result is the problem. The document itself needs to be reopened and, in most cases, amended or restated while the exemption is known and the client is alive.

None of this makes OBBBA a drafting error. The permanent exemption is the law, and clients with estates under the new threshold should benefit from it. What the law exposed is the weakness of the formula as a planning device: formula clauses were an attempt to make a plan self-correcting when Congress kept changing the number, but a formula corrects the amount; it cannot correct the beneficiary, the family's current circumstances, or the basis trade-off. At the new level, the mechanism no longer adjusts the size of the gift; it adjusts who receives the estate.

For an RIA, the right response is to treat every pre-2026 plan with formula funding language as an amendment candidate, not a calculation problem. Re-running the numbers is cheap and produces a client who has actively re-decided who gets the money; that decision is the only document that will hold up if the formula turns out to be wrong. The report notes that these problems usually surface after the client has died, when no one is left to explain intent, and the year-end window is the industry's chance to replace that silence with a meeting. The review season should end with a new signature or a written, current decision that the old allocation is still right.