diff --git a/python/packages/claude/agent_framework_claude/_agent.py b/python/packages/claude/agent_framework_claude/_agent.py
index 8335d2f149..f8f3796656 100644
--- a/python/packages/claude/agent_framework_claude/_agent.py
+++ b/python/packages/claude/agent_framework_claude/_agent.py
@@ -511,6 +511,9 @@ async def handler(args: dict[str, Any]) -> dict[str, Any]:
             "properties": schema.get("properties", {}),
             "required": schema.get("required", []),
         }
+        # Preserve $defs for nested type references (Pydantic uses $defs for nested models)
+        if "$defs" in schema:
+            input_schema["$defs"] = schema["$defs"]
 
         return SdkMcpTool(
             name=func_tool.name,
diff --git a/python/packages/claude/tests/test_claude_agent.py b/python/packages/claude/tests/test_claude_agent.py
index 4402b611e4..15fc0b8090 100644
--- a/python/packages/claude/tests/test_claude_agent.py
+++ b/python/packages/claude/tests/test_claude_agent.py
@@ -499,6 +499,33 @@ def greet(name: str) -> str:
         assert sdk_tool.input_schema is not None
         assert "properties" in sdk_tool.input_schema  # type: ignore[operator]
 
+    def test_function_tool_to_sdk_mcp_tool_preserves_defs_for_nested_types(self) -> None:
+        """Test that $defs is preserved for tools with nested Pydantic models."""
+        from pydantic import BaseModel
+
+        class Address(BaseModel):
+            street: str
+            city: str
+
+        class Person(BaseModel):
+            name: str
+            address: Address
+
+        @tool
+        def create_person(person: Person) -> str:
+            """Create a person with address."""
+            return f"{person.name} lives at {person.address.street}, {person.address.city}"
+
+        agent = ClaudeAgent()
+        sdk_tool = agent._function_tool_to_sdk_mcp_tool(create_person)  # type: ignore[reportPrivateUsage]
+
+        # Verify $defs is preserved in the schema
+        assert sdk_tool.input_schema is not None
+        assert "$defs" in sdk_tool.input_schema  # type: ignore[operator]
+        assert "Address" in sdk_tool.input_schema["$defs"]  # type: ignore[index]
+        # Verify the nested reference exists in properties
+        assert "person" in sdk_tool.input_schema["properties"]  # type: ignore[index]
+
     async def test_tool_handler_success(self) -> None:
         """Test tool handler executes successfully."""
 
diff --git a/python/packages/core/agent_framework/_tools.py b/python/packages/core/agent_framework/_tools.py
index 2ebd7b9015..d88fa4b54c 100644
--- a/python/packages/core/agent_framework/_tools.py
+++ b/python/packages/core/agent_framework/_tools.py
@@ -796,11 +796,26 @@ async def invoke(
 
         attributes = get_function_span_attributes(self, tool_call_id=tool_call_id)
         if OBSERVABILITY_SETTINGS.SENSITIVE_DATA_ENABLED:  # type: ignore[name-defined]
+            # Filter out framework kwargs that are not JSON serializable
+            serializable_kwargs = {
+                k: v
+                for k, v in kwargs.items()
+                if k
+                not in {
+                    "chat_options",
+                    "tools",
+                    "tool_choice",
+                    "thread",
+                    "conversation_id",
+                    "options",
+                    "response_format",
+                }
+            }
             attributes.update({
                 OtelAttr.TOOL_ARGUMENTS: arguments.model_dump_json()
                 if arguments
-                else json.dumps(kwargs)
-                if kwargs
+                else json.dumps(serializable_kwargs, default=str)
+                if serializable_kwargs
                 else "None"
             })
         with get_function_span(attributes=attributes) as span:
diff --git a/python/packages/core/tests/workflow/test_edge.py b/python/packages/core/tests/workflow/test_edge.py
index 42e3893a73..95dc71219d 100644
--- a/python/packages/core/tests/workflow/test_edge.py
+++ b/python/packages/core/tests/workflow/test_edge.py
@@ -10,7 +10,6 @@
     Executor,
     InProcRunnerContext,
     Message,
-    SharedState,
     WorkflowContext,
     handler,
 )
@@ -24,6 +23,7 @@
     SwitchCaseEdgeGroupDefault,
 )
 from agent_framework._workflows._edge_runner import create_edge_runner
+from agent_framework._workflows._shared_state import SharedState
 from agent_framework.observability import EdgeGroupDeliveryStatus
 
 # Add for test
diff --git a/python/packages/core/tests/workflow/test_workflow_states.py b/python/packages/core/tests/workflow/test_workflow_states.py
index 53baf86383..4aec349d15 100644
--- a/python/packages/core/tests/workflow/test_workflow_states.py
+++ b/python/packages/core/tests/workflow/test_workflow_states.py
@@ -8,7 +8,6 @@
     ExecutorFailedEvent,
     InProcRunnerContext,
     RequestInfoEvent,
-    SharedState,
     Workflow,
     WorkflowBuilder,
     WorkflowContext,
@@ -20,6 +19,7 @@
     WorkflowStatusEvent,
     handler,
 )
+from agent_framework._workflows._shared_state import SharedState
 
 
 class FailingExecutor(Executor):
diff --git a/python/packages/declarative/agent_framework_declarative/_workflows/_declarative_base.py b/python/packages/declarative/agent_framework_declarative/_workflows/_declarative_base.py
index 309a71a4b7..5fc34e1d7a 100644
--- a/python/packages/declarative/agent_framework_declarative/_workflows/_declarative_base.py
+++ b/python/packages/declarative/agent_framework_declarative/_workflows/_declarative_base.py
@@ -32,9 +32,9 @@
 
 from agent_framework._workflows import (
     Executor,
-    SharedState,
     WorkflowContext,
 )
+from agent_framework._workflows._shared_state import SharedState
 from powerfx import Engine
 
 if sys.version_info >= (3, 11):