© 2026 Wealth Care Lawyer — Klaus Gottlieb, Esq. Serving the California Central Coast.
Jurisdiction: California (primary); federal estate and income tax law
Primary Statutes: Cal. Prob. Code §§ 15403, 15404, 15408, 15409, 19501–19530; I.R.C. §§ 1014, 2010(c), 2041, 2044, 2056, 2518
Key Cases: Estate of Clayton v. Commissioner, 976 F.2d 1486 (5th Cir. 1992); Estate of Araiza v. Younkin, 183 Cal. App. 4th 1155 (2010)
Last Reviewed: March 2026
Category: Estate Planning — Trust Administration — Post-Mortem
Millions of California couples executed A-B trusts in the 1990s and early 2000s, when the federal estate tax exemption was as low as $600,000. The surviving spouse was supposed to fund the bypass trust (Trust B) at the first death. Many never did. With the exemption now at $15 million per person under the One Big Beautiful Bill Act (OBBBA), that failure is often harmless — but sometimes it is not. Whether the failure constitutes a breach of fiduciary duty, whether it has tax consequences, and what can be done about it depend entirely on the facts. This article maps every scenario, identifies the decision points, and ranks the available California remedies from least to most invasive, with an emphasis on staying out of court.
An A-B trust is a joint revocable living trust that splits into two sub-trusts at the death of the first spouse. Trust A (the Survivor’s Trust) holds the surviving spouse’s half of the community property plus any separate property bequeathed to the survivor. Trust A remains revocable. Trust B (the Bypass Trust, also called the Credit Shelter Trust or Family Trust) is funded with the deceased spouse’s share of assets, up to the applicable exclusion amount in effect at the first death. Trust B is irrevocable from the moment of the first death.
The economic rationale was straightforward: by placing up to the exemption amount in Trust B at the first death, those assets — and all future appreciation — bypass the surviving spouse’s taxable estate entirely. Only Trust A assets are included in the survivor’s estate at the second death. In estates where the combined value exceeded one exemption, the result was a meaningful estate tax saving.
I.R.C. § 2010(c) — Applicable Exclusion Amount. The basic exclusion amount is $15,000,000 per individual under the OBBBA (effective for deaths after July 4, 2025), indexed for inflation. For pre-OBBBA deaths in 2025, the exemption was $13,990,000.
I.R.C. § 2010(c)(2)–(5) — Portability/DSUE. The Deceased Spousal Unused Exclusion Amount (DSUE) is the portion of the first spouse’s exemption not used at the first death. The executor of the first estate must elect portability on a timely filed Form 706 to preserve the DSUE for the surviving spouse. Rev. Proc. 2022-32 allows a simplified late portability election within five years of the date of death; after five years, only a private letter ruling (PLR) is available.
I.R.C. § 1014 — Basis at Death. Property included in a decedent’s gross estate receives a stepped-up (or stepped-down) basis to fair market value at the date of death. Property held in a bypass trust that is excluded from the surviving spouse’s gross estate does not receive a second basis step-up at the survivor’s death.
I.R.C. §§ 2056(b)(7) and 2044 — QTIP Trusts. A trust for the surviving spouse’s benefit can qualify for the marital deduction under § 2056(b)(7) if a QTIP election is made on the first decedent’s Form 706. QTIP trust assets are included in the surviving spouse’s gross estate under § 2044 at the second death — which means they receive a § 1014 basis step-up.
I.R.C. § 2041 — General Powers of Appointment. If a beneficiary holds a general power of appointment over trust assets at death, those assets are included in the beneficiary’s gross estate under § 2041, triggering § 1014 basis step-up at the beneficiary’s death.
I.R.C. § 2518 — Qualified Disclaimer. A beneficiary may refuse to accept property within nine months of the date of the transfer (generally the date of death) by written disclaimer, without gift tax consequence, provided no benefits have been accepted.
§ 15401 — Revocation Procedure. A revocable trust may be revoked by written instrument delivered to the trustee. The surviving spouse as trustee of Trust A retains full revocability.
§ 15403 — Court Modification/Termination (All Beneficiaries Consent, No Settlor). If all beneficiaries of an irrevocable trust consent, they may petition the court for modification or termination. The court may deny the petition if the continuance of the trust is necessary to carry out a material purpose and the material purpose outweighs the reason for modification.
§ 15404 — Non-Court Modification/Termination (Settlor + All Beneficiaries Consent). A trust may be modified or terminated by the written consent of the settlor and all beneficiaries, without court approval. This section is critically limited in the A-B context: one of the two settlors is deceased. The section cannot be used without both settlors’ participation when the bypass trust was funded by both spouses’ contributions, and even where only the surviving spouse contributed to the bypass trust’s funding, using § 15404 without court involvement exposes the trustee to later claims.
§ 15408 — Uneconomical Trust. Where a trust’s principal is so low that administration costs defeat the trust’s purpose, the court may terminate or modify it. If the trust principal does not exceed $20,000, the trustee may terminate without court order.
§ 15409 — Changed Circumstances. On petition by a trustee or beneficiary, the court may modify or terminate a trust if, owing to circumstances not known to and not anticipated by the settlor, continuation of the trust under its terms would defeat or substantially impair the trust’s purpose.
§§ 19501–19530 — California Uniform Trust Decanting Act (UTDA). Effective January 1, 2019, a trustee with discretionary distribution authority may “decant” an irrevocable trust’s assets into a new trust with different terms, without court approval. Notice to beneficiaries is required. As discussed in Part IV below, decanting has limited application in the A-B bypass trust context because of § 19519(b)(8)’s restriction on tax-benefit modifications.
§ 16420–16440 — Remedies for Breach. Courts may compel a trustee to perform duties, surcharge the trustee for losses caused by a breach, or remove the trustee. The statute of limitations for a breach of trust claim is three years from the date the beneficiary knew or reasonably should have known of the breach — or three years from the trustee’s written report that adequately disclosed the facts. Absent any accounting or disclosure, the clock may not have started running.
At the first spouse’s death, the jointly held trust assets must be identified, valued, and allocated between Trust A and Trust B. The allocation is a formal act: assets (or ownership interests in assets) are retitled in the name of “The [Surname] Family Trust, Trust B” or documented through a schedule of allocation. No allocation = no funding. In practice, many surviving spouses simply continued holding all assets in one account titled to “The [Surname] Family Trust,” using it freely, while Trust B sat empty. Sometimes the attorney failed to instruct the client. Sometimes the client was instructed but could not face the administrative burden while grieving. The result is the same: Trust B is an empty shell.
Before analyzing consequences, the attorney must determine what kind of trust the couple executed. The answer to “was there a breach?” turns entirely on this question.
Type 1 — Mandatory Funding. The trust instrument contains language directing the trustee to allocate assets to Trust B at the first death: “Upon the death of the first Settlor to die, the Trustee shall allocate to Trust B an amount equal to the maximum amount that can pass free of federal estate tax…” or equivalent language using “shall.” Failure to fund Trust B under a mandatory instrument is a breach of the trustee’s duty to administer the trust according to its terms. The surviving spouse acting as trustee is personally liable to the Trust B remainder beneficiaries.
Type 2 — Disclaimer Trust (Optional Funding). The trust instrument does not require Trust B to be funded. Instead, it gives the surviving spouse the option — typically within nine months of the first death — to disclaim assets that would then flow to Trust B. If the survivor does not disclaim, everything stays in Trust A. Failure to fund Trust B under a disclaimer trust is not a breach. It was a discretionary election, and the survivor chose not to make it. The DSUE/portability question becomes critical here.
Type 3 — Clayton Election Variant. Some instruments were drafted with a “QTIPable bypass trust” structure: the bypass trust qualifies for a QTIP election if one is made on the estate tax return, but the executor or surviving spouse (in a self-proving design) may elect to treat the trust either as a bypass trust or a QTIP trust. Where a QTIP election was made over the entire estate, Trust B may simply not exist as a funded entity. This is not a breach; it was the intended planning mechanism.
⚠️ CRITICAL FIRST STEP: Read the trust instrument before doing anything else. The mandatory/discretionary distinction determines every downstream analysis.
The consequences of an unfunded bypass trust fall into four quadrants defined by (1) whether the combined estate is taxable and (2) whether portability was preserved.
| Portability Elected (Form 706 Filed) | Portability Not Elected | |
|---|---|---|
| Combined estate below exemption at Survivor’s death | No estate tax problem. Potential income tax opportunity missed (see below). | No estate tax problem. Same income tax issue. |
| Combined estate above exemption at Survivor’s death | Estate tax problem partially mitigated (DSUE available but doesn’t cover appreciation). | Estate tax problem: first spouse’s exemption is wasted. Potentially significant tax at second death. |
This is the most common situation the California attorney now encounters. A couple who established their A-B trust in 1998 had a combined estate of $1.5 million. The exemption was $625,000. Their plan made sense. Today the survivor holds the same $1.5 million in assets (perhaps grown to $2–3 million). With the OBBBA exemption at $15 million per person, there is no federal estate tax risk whatsoever. There is no California estate tax. The failure to fund Trust B created no estate tax harm.
There is, however, a potential income tax observation worth flagging: if the bypass trust had been funded with the first spouse’s appreciated assets, those assets would have received a § 1014 step-up at the first death but not a second step-up at the survivor’s death. By staying unfunded, all assets remain in the survivor’s estate and will receive a full step-up at the second death. For clients in this scenario, the failure to fund was inadvertently beneficial from an income tax perspective. There is nothing to fix.
📌 PLANNING NOTE: For clients with estates comfortably below $15 million, the correct advice is often: leave the bypass trust empty, make sure assets are titled correctly in Trust A, and document the decision. Consider whether a portability election is worth preserving (it is, as insurance against future appreciation). Rev. Proc. 2022-32 gives you five years from the date of death to file a late Form 706 to capture the DSUE.
This is the financially consequential case. Assume David dies in 2015 with a combined marital estate of $10 million. The TCJA exemption at the time was $5.43 million. The bypass trust should have been funded with $5.43 million of David’s assets. It was not. No Form 706 was filed. Carol, the survivor, now holds $10 million (grown with appreciation to, say, $14 million). When Carol dies in 2027, her applicable exclusion is $15 million. She is fine — barely. But suppose the estate grew to $18 million or Carol remarried and lost the DSUE opportunity. Now the first spouse’s exemption is wasted and the estate is taxable.
The degree of harm depends on the math. The attorney should prepare a projection comparing:
If the harm is real and the beneficiaries are pressing for accountability, this is a breach of fiduciary duty case. The attorney representing the surviving spouse trustee needs to address both the legal exposure and the tax mitigation options.
If Form 706 was timely filed and the DSUE was elected, the surviving spouse has an enhanced exclusion. Using the example above: David dies in 2015, $5.43 million exemption used zero (bypass trust not funded), DSUE = $5.43 million transferred to Carol. Carol now has $5.43M + $15M (OBBBA) = $20.43M of exclusion. If her estate is below that, there is no estate tax problem from the failure to fund.
The caveat: DSUE is locked at its dollar amount at the first death. It does not appreciate. If David’s $5.43 million of assets that should have gone into Trust B grew to $10 million by Carol’s death, the bypass trust would have sheltered $10 million from Carol’s estate. The portability election only shelters $5.43 million. The growth — $4.57 million — is unprotected. For rapidly appreciating estates, portability is an incomplete substitute for a funded bypass trust.
Regardless of estate tax, an important income tax trade-off exists that is often missed:
Bypass trust properly funded: Assets receive a § 1014 step-up at the first death (to FMV at first death). They do not receive a second step-up at the survivor’s death because they are not included in the survivor’s gross estate. Beneficiaries who inherit bypass trust assets after the second death inherit with the first-death basis — plus no adjustment for post-first-death appreciation. If the assets grew substantially between the two deaths, the capital gains tax liability passed to the remainder beneficiaries can be significant.
Bypass trust unfunded: All assets remain in the survivor’s estate. They receive a full § 1014 step-up at the second death. Zero capital gains exposure to remainder beneficiaries (assuming they sell promptly after inheriting).
This means that in many modern estates where estate tax is not a concern, failing to fund the bypass trust produced a better income tax result. Whether this observation helps the surviving trustee who faces a breach claim depends on whether the estate tax harm is real. If it is not (estate below exemption), the net effect of the failure may have been zero or positive — which is a defense to any surcharge claim.
The surviving spouse acting as trustee under a mandatory funding instrument owes a duty to the Trust B remainder beneficiaries to fund Trust B at the first death. Failure to do so is a breach of the duty to administer the trust according to its terms (Cal. Prob. Code § 16000). The trustee is personally liable for losses caused by the breach.
Under Cal. Prob. Code § 16460, the limitations period for a breach of trust claim is the later of (a) three years after the beneficiary knew or reasonably should have known of the breach, or (b) three years after the trustee sent a written report that adequately disclosed the facts giving rise to the claim.
In the typical unfunded bypass trust situation, the trustee-survivor has filed no accountings and provided no written reports. The beneficiaries (often children of the first marriage) may have had no reason to scrutinize the trust administration. In that scenario, the statute of limitations may not have started running. The problem is therefore open and live until the beneficiaries acquire actual or constructive knowledge.
⚠️ CRITICAL ISSUE: If the surviving spouse is now incapacitated or near death, the limitations clock is about to matter intensely. The successor trustee or the beneficiaries will be entitled to demand an accounting. An attorney retained to help the surviving spouse should be aware that filing a formal accounting now — even a voluntary one — starts the three-year clock and may ultimately be protective.
The goal is to resolve the situation cleanly, protect the trustee from ongoing liability, and achieve the optimal tax outcome. The following options are ranked from simplest to most complex. Not all options are available in every scenario.
Before abandoning Trust B, consider whether late funding is feasible and desirable. If the surviving spouse is still alive, still serves as trustee, and still holds assets originally belonging to the deceased spouse’s estate, late funding may be possible. A transfer of assets from Trust A to Trust B would be:
Late funding does not cure the income tax issue (no step-up on those assets at the survivor’s death), but it does protect against estate tax and satisfies the trustee’s fiduciary obligation.
What it is. Cal. Prob. Code § 15404 allows a trust to be modified or terminated by written consent of the settlor and all beneficiaries, without court approval.
Why it is problematic in the A-B context. One of the two settlors is dead. The better view — and the safer view — is that § 15404 requires both settlors’ participation, and one is unavailable. Some practitioners argue that in a community property trust the surviving spouse was a co-settlor of the entire trust and can act alone under § 15404. That reading is risky. If a beneficiary later challenges the modification, the absence of court approval under § 15403 leaves the trustee exposed with no statutory shield.
When it works. If the trust was a purely separate property trust funded entirely by the surviving spouse (rare), or if all parties agree and the risk of a future disgruntled beneficiary is genuinely zero (homogeneous family, no blended family, no minor or unborn beneficiaries), some practitioners use § 15404 with a comprehensive written consent agreement and indemnity language. This is a high-risk, low-cost option. Use with caution.
Practical checklist if used:
When not to use § 15404. If there are any minor beneficiaries, unborn beneficiaries, or any family member who might later become a disgruntled beneficiary — stop here and proceed directly to a court petition under § 15403 or § 15409. The risk of a future challenge to an out-of-court modification where consent was imperfect is not worth the filing fee saved. § 15404 is for the rare case where the family is cohesive, all adults, and the likelihood of future litigation is genuinely zero.
What it is. Some bypass trust instruments give the trustee (or an independent trustee, or trust protector) discretionary authority to not fund Trust B, to terminate Trust B if it is uneconomical, or to modify its terms. This is a trust protector provision or an express discretionary funding provision.
How to use it. If the instrument contains this language, the trustee has authority to act without court approval or beneficiary consent (within the scope of the granted power). Document the exercise of the power with a formal written trustee’s resolution, citing the trust section and the reasoning (changed tax law, estate size relative to exemption, etc.).
Limitation. Many older A-B trust instruments — particularly those drafted in the 1990s — do not contain this language. Trust protectors were not yet common in California drafting practice. Review the instrument carefully.
What it is. Cal. Prob. Code § 15408(b) allows the trustee to terminate a trust without court order if the trust principal does not exceed $20,000 in value.
The argument as applied to an unfunded bypass trust. Trust B has zero assets. Zero is less than $20,000. Therefore, the argument goes, the trustee may terminate Trust B by written instrument without court approval.
Why this argument is weak. This provision has never been tested in California courts in the context of a trust that was never funded. The statute’s evident purpose is to address trusts whose principal has dwindled through distributions or losses — trusts that once held assets but have become uneconomical to administer. A trust that was never funded is a different animal: it arguably has no “principal” in the statutory sense at all. A court asked to evaluate this argument after the fact might well conclude that § 15408(b) does not apply, that the termination was unauthorized, and that the trustee’s fiduciary duty to fund Trust B was therefore never discharged. The “terminated empty trust” could be unwound.
Practical reality. No California published decision has addressed this. The argument has a certain logical appeal — it is hard to challenge a trust containing nothing — but “difficult to challenge” and “legally sound” are not the same thing. If the stakes are low (estate well below exemption, homogeneous family, no foreseeable litigation), the risk may be acceptable as a belt-and-suspenders gesture alongside beneficiary consent letters. If there is any realistic litigation risk, do not rely on § 15408(b) for an unfunded bypass trust. Use § 15409 instead and get a court order.
⚠️ CRITICAL ISSUE: Do not cite § 15408(b) as solid authority for terminating an unfunded bypass trust. Present it to your client as an untested argument that may not withstand scrutiny. If there is any doubt about the family dynamics, go to court.
What it is. All parties — surviving spouse, all current beneficiaries, all remainder and contingent beneficiaries — sign a written agreement acknowledging that Trust B will not be funded, confirming that no party has suffered harm (because the estate is below the taxable threshold), and releasing the trustee from any claims arising from non-funding.
Practical value. Even without relying on § 15404, a comprehensive written agreement signed by all interested parties is powerful evidence in any future litigation. The Uniform Trust Code (adopted in modified form in California) recognizes that beneficiary consent can bar a breach claim (see Cal. Prob. Code § 16463 — exculpation with trustee and beneficiary agreement).
Limitations. Minors must be represented. Unborn beneficiaries cannot consent. The agreement does not formally modify the trust instrument, so the theoretical obligation to fund technically persists. Best used in conjunction with § 15408(b) termination of the empty Trust B shell.
What it is. A petition to the probate court under § 15409 requesting modification or termination of Trust B’s funding requirement on grounds that circumstances not known to or anticipated by the settlors make continuation of the mandatory funding provision contrary to the trust’s purposes.
Why this argument wins. The settlors of a 1995 A-B trust could not have anticipated: (1) the elimination of the estate tax sunset provisions and the TCJA’s near-doubling of the exemption; (2) the OBBBA’s permanent increase to $15 million; (3) the introduction of portability in 2010; (4) the income tax cost of a bypass trust (loss of second basis step-up) that was not significant when asset appreciation was modest. Courts routinely grant § 15409 petitions in the obsolete bypass trust context. The California Lawyer for Seniors practice community notes that “California courts routinely grant those requests, and the relief is retroactive.”
Procedure. File a petition in the probate division of the superior court in the county where the trust is administered. Notice to all beneficiaries is required. Absent opposition, the hearing is typically brief and the order is granted. The order may retroactively ratify the non-funding from the date of the first spouse’s death, which protects the trustee against breach claims.
When to use. Use Option E when: (1) there are blended family beneficiaries who may not consent; (2) minor or unborn beneficiaries make § 15404 impossible; or (3) the trustee wants the protection of a court order rather than relying on written consents that might later be challenged.
What it is. A petition under § 15403 where all beneficiaries consent, asking the court to approve modification or termination of Trust B. The court must also find that the modification does not defeat a material purpose of the trust — or if it does, that the reasons for modification outweigh the material purpose interest.
Relationship to § 15409. Section 15403 and § 15409 are complementary. When beneficiaries consent, use § 15403. When the argument is driven by changed circumstances (regardless of consent), use § 15409. In practice, many petitions plead both.
Spendthrift clause complication. Most bypass trusts contain a spendthrift clause. This does not prevent § 15403 modification, but the court will consider it as a factor. Combined with beneficiary consent and the changed-circumstances argument, the spendthrift clause is rarely decisive.
Even if Trust B cannot or will not be terminated, the following tax strategies address the income and estate tax consequences of the unfunded bypass trust without resolving the state law breach question.
If Form 706 was not filed at the first death, the surviving spouse has five years from the date of death to file a late portability election under Rev. Proc. 2022-32. This is purely administrative — no court involvement, no beneficiary consent required. The executor files a late Form 706 stating it is filed solely to elect portability; no estate tax will be due if assets are below the applicable exclusion. The DSUE is preserved for the surviving spouse.
Action item: Calculate the time remaining. If the first spouse died within the last five years, file Form 706 immediately if portability has not been elected. After five years, a Private Letter Ruling is required — significantly more expensive and uncertain.
What it is. Estate of Clayton v. Commissioner, 976 F.2d 1486 (5th Cir. 1992) established that a QTIP election relates back to the date of the decedent’s death. If the bypass trust qualifies as a QTIP trust (surviving spouse receives all income at least annually; no other person may receive distributions during the survivor’s lifetime), a QTIP election can be made on a late-filed Form 706. This converts the bypass trust (retroactively) into a QTIP trust, causing it to be included in the surviving spouse’s gross estate under § 2044 at the second death — which triggers a full § 1014 basis step-up on all bypass trust assets.
When this is desirable. This strategy makes sense when: (1) the combined estate is below the applicable exclusion (no estate tax will result from § 2044 inclusion); (2) the bypass trust holds highly appreciated assets; and (3) the goal is to eliminate capital gains tax exposure for the remainder beneficiaries. It converts a capital gains problem into a non-problem by obtaining the second basis step-up at no estate tax cost.
Requirement. The bypass trust must be “QTIPable” — meaning it satisfies the requirements of § 2056(b)(7). Most older A-B trusts gave the surviving spouse all income for life with no distributions to others during the survivor’s lifetime, which satisfies the QTIP requirements. However, many bypass trusts also permitted principal distributions to the surviving spouse under a HEMS standard. The income-only requirement must be checked carefully.
Retroactive income allocation. Because the QTIP election relates back to the first death, all income earned by the bypass trust since the first death must be treated as distributed to the surviving spouse. This may require amended income tax returns.
⚠️ CRITICAL ISSUE: The Clayton QTIP election is powerful but irreversible. Once made, it cannot be undone. The attorney should model both scenarios — with and without the election — before advising the client. The gain in basis step-up must outweigh the resulting § 2044 inclusion if the estate is at or near the taxable threshold.
What it is. Once a bypass trust has been modified by court order under § 15403 or § 15409, one available modification is to grant the surviving spouse a general power of appointment over the bypass trust corpus. Under § 2041, a general power of appointment held at death causes estate inclusion. Under § 1014(b)(9), estate inclusion triggers a § 1014 basis step-up.
Why the predicate court order matters. A new general power of appointment cannot be unilaterally inserted into an already-irrevocable trust by the surviving spouse acting alone, regardless of the tax benefit. The trust became irrevocable at the first spouse’s death, and the surviving spouse as trustee has no authority to amend its dispositive terms. What makes this strategy legitimate is that the court order under § 15403 or § 15409 modifies the trust instrument to include the GPA. The modification is prospective; the tax consequences (§ 2041 inclusion and § 1014 step-up) arise when the surviving spouse subsequently dies holding the power. The IRS and estate planning literature recognize this technique as valid when properly implemented through judicial modification.
When this is preferable to the Clayton election. Use the GPA approach when the bypass trust does not qualify as a QTIP trust — because, for example, it permits principal distributions to multiple beneficiaries or does not require income to be distributed at least annually. In that case, the Clayton election is unavailable, but the GPA route remains open if the court grants the modification.
Important limitation. A general power of appointment causes estate inclusion under § 2041 regardless of whether the survivor ever exercises it. If the estate grows unexpectedly and exceeds the applicable exclusion before the survivor dies, the GPA will generate estate tax. Use this strategy only when the estate is comfortably below the exclusion with meaningful cushion, and stress-test it against potential appreciation.
The California Uniform Trust Decanting Act (Cal. Prob. Code §§ 19501–19530) allows the trustee of an irrevocable trust with discretionary distribution authority to transfer assets into a new trust with different terms, without court approval, upon proper notice to beneficiaries. This sounds like an ideal tool for reforming an obsolete bypass trust.
The problem. Cal. Prob. Code § 19519(b)(8) restricts decanting that would modify a “tax benefit” — defined to include trust provisions qualifying assets for favorable federal tax treatment. The Official Comments to the Uniform Trust Decanting Act (NCCUSL 2015), which California adopted, state expressly that this restriction is intended to prevent decanting from altering the tax structure of a trust in a way that could trigger adverse tax consequences or that was specifically incorporated to obtain a tax benefit. A decanting that eliminates the bypass trust’s credit-shelter function, or converts it to a QTIP, is precisely the kind of structural tax modification that § 19519 restricts. The decanting power is also limited by the degree of the trustee’s distribution discretion: if the trustee has only HEMS-standard distribution authority (the norm in most surviving-spouse bypass trusts), the scope of permissible decanting is correspondingly narrow.
The narrow exception. Decanting may work if the bypass trust appoints the surviving spouse as trustee with expanded discretionary distribution authority — because the decanting power is measured against the distribution authority of the original trustee. If an independent trustee with expanded discretion is named as successor, and that trustee decants to a new trust, the § 19519 restriction may not apply. This is technical and fact-dependent.
Practical recommendation. Do not rely on decanting as the primary remedy for an unfunded bypass trust without careful analysis of the specific trust language. Use § 15408(b), § 15404 (if available), or § 15409 instead.
| Scenario | Mandatory Funding? | Estate Taxable? | Best Non-Court Option | Best Court Option |
|---|---|---|---|---|
| Estate below exemption, no blended family, all consent | Yes | No | § 15408(b) termination + consent letters | § 15409 (changed circumstances) |
| Estate below exemption, blended family | Yes | No | § 15408(b) + Clayton election for basis | § 15409 petition |
| Estate above exemption, portability elected | Yes | Marginal | Late fund Trust B now; Clayton election | § 15409 if late funding impossible |
| Estate above exemption, no portability | Yes | Yes | Late portability if within 5 years; then late fund | § 15409 + surcharge defense analysis |
| Disclaimer trust — survivor never disclaimed | No | N/A | No action needed — file Form 706 for DSUE | None required |
| Clayton election design — QTIP made | No | N/A | No action needed | None required |
Checklist for the First Client Meeting
Drafting Checklist for New Trusts — Avoiding This Problem
⚠️ COMMON ERROR: Attorneys frequently advise surviving spouse clients to “just ignore” the bypass trust requirement where everyone informally agrees it is not needed. This is inadequate. Without a formal termination under § 15408(b), a § 15404 consent, or a court order, the open Trust B shell creates an unresolved fiduciary obligation that can be asserted by any beneficiary — including a subsequent spouse’s child or an omitted heir — years later.
📌 PLANNING NOTE: When the surviving spouse is approaching death and the estate is below the applicable exclusion, the optimal income tax strategy is typically to leave all assets in Trust A so they receive a full § 1014 step-up at the second death. Retroactively funding Trust B at that point would eliminate the step-up on those assets without offsetting estate tax savings. The empty Trust B should be formally terminated under § 15408(b) or § 15409 at this point, and the attorney should document the basis step-up analysis in the file.
This article is provided for educational purposes and reflects California law as of March 2026. It does not constitute legal advice, and no attorney-client relationship is created by its use. Readers should consult qualified legal counsel regarding their specific circumstances. Tax law references are current as of the date of this article; legislative and regulatory changes should be verified before reliance.
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