The New Tax Law Is Here. Is Your Trust Ready?

A client emailed me last week with a CNBC article and a simple question: "Does this affect our trust?"

It's exactly the kind of question I want my clients asking.

The article highlighted a little-known provision buried in the One Big Beautiful Bill that tax attorneys and CPAs are warning could create double taxation for certain trusts. The issue wasn't in the headline of the law. It showed up later, in guidance released after the bill was signed.

So, what was my answer?

Maybe.

Here's what we know so far and what families with trusts should be paying attention to right now.

What Congress Intended 

When the One Big Beautiful Bill became law, most of the attention focused on one change: the federal estate tax exemption increased to $15 million per person, or $30 million for a married couple, beginning in 2026. For families concerned about federal estate taxes, that was welcome news.

That's the change everyone heard about.

What received far less attention was another provision buried in the same law, one that tax professionals say could affect certain trusts, including trusts created by families with far more modest estates.

The bottom line: The higher estate tax exemption is significant for families subject to federal estate tax. But another, much quieter provision in the same legislation could have consequences for a much broader group of trust owners, even those nowhere near the estate tax exemption.

The Tax Rule Hidden in the Footnotes 

The One Big Beautiful Bill introduced a new limitation on certain tax deductions for high-income taxpayers. Under the new rule, once a taxpayer reaches the highest federal income tax bracket, the value of certain deductions is reduced.

What tax attorneys and accountants soon realized is that this same limitation appears to apply to trusts and estates.

Here's why that's significant. Trusts reach the highest federal income tax bracket much faster than individuals do. In 2026, a trust reaches the 37% bracket at approximately $16,000 of taxable income. A single taxpayer doesn't reach that same rate until taxable income exceeds $640,600.

That means a relatively modest family trust earning just $16,000 of taxable income may now be subject to a rule that was intended for the nation's highest-income taxpayers.

The concern lies in how trusts have traditionally been taxed. When a trust distributes income to a beneficiary, the trust generally deducts that distribution, and the beneficiary pays the tax. The income is taxed once, at the beneficiary level. Under this new provision, that result may no longer occur.

Here's the concern. The One Big Beautiful Bill limits the deduction benefit for taxpayers in the highest bracket to 35 cents per dollar instead of 37 cents. If that limitation applies to trusts, a trust required to distribute $370,000 of income to a surviving spouse may only be able to deduct $350,000. The surviving spouse still pays tax on the full $370,000 she received, while the trust also pays tax on the remaining $20,000 it couldn't deduct. To cover that additional tax, the trustee may have to invade principal or ask the court to reduce future distributions. Neither outcome is what the trust was designed to accomplish.

The bottom line: A little-known provision buried in the new tax law may create unintended double taxation for certain trusts that were operating exactly as intended before the rules changed.

Who Needs to Know About This 

This isn't just an issue for ultra-wealthy families. In fact, many of the professionals raising concerns about this provision are talking about much smaller trusts.

One wealth advisor told CNBC, "This is something that is going to affect somebody with a $400,000 special needs trust. It's not just going to be something that $100 million dynasty trusts suffer with."

Think about a special needs trust. If you've established one to provide for a child with a disability while preserving eligibility for government benefits, this new limitation could mean the trust pays tax on income it distributes even while your child is paying tax on that same income.

Or consider a trust for a surviving spouse. Many couples use trusts to provide ongoing income for the surviving spouse while preserving the remaining assets for their children. If this provision applies, the trust could owe tax on income that has already been taxed to the surviving spouse, forcing the trustee to either invade principal or ask a court to reduce future distributions.

The same concern may apply to irrevocable life insurance trusts and other irrevocable trusts that generate taxable income.

The common thread is trusts that are required to distribute income to someone who depends on it. QTIP trusts for surviving spouses, special needs trusts, and certain irrevocable trusts appear to be the most directly affected, while trusts with greater flexibility may have more planning options as additional guidance is released.

Perhaps most importantly, these rules apply to income earned beginning in 2026. For many families, this isn't a future issue, it's one that's already underway.

The bottom line: If your trust distributes income to a beneficiary, it's worth finding out whether this new provision applies. The families most likely to be affected aren't necessarily the wealthiest. They're the ones who created trusts to care for someone they love, a surviving spouse, a child with a disability, or another dependent relying on those distributions.

What We Know So Far 

It's important to understand that this concern comes from the Joint Committee on Taxation's Bluebook, Congress's official explanation of the law, not from the statutory language itself. The Treasury Department is expected to issue guidance that could clarify how this provision applies, which trusts are affected, and whether the double taxation concern is as broad as many professionals currently believe.

For that reason, tax attorneys and CPAs are watching this very closely. Most are taking the same approach: hope the guidance narrows the impact, but prepare in case it doesn't.

As one tax attorney told CNBC, "We hope for the best but plan for the worst."

What we do know is that the provision applies beginning with the 2026 tax year. If your trust is generating income now, waiting for perfect certainty may mean waiting too long to evaluate your options.

The bottom line: Treasury guidance could significantly change how this provision is ultimately applied or it could confirm the concerns tax professionals are raising today. Until we know more, thoughtful planning is the right approach. I'm following this issue closely, and if you're a client whose trust could be affected, you won't have to wonder whether something changed. I'll reach out, explain what the guidance means for your plan, and make recommendations if any action is needed.

What You Should Do Now 

If you have a trust, now is the time to make sure it's still accomplishing what you created it to do.

That starts with understanding how your trust is structured, what income it generates, and who relies on those distributions. Some trusts may benefit from changes. Distribution strategies can sometimes be adjusted. In other cases, a different structure may better accomplish your original goals under today's tax rules.

What I know for certain is this: families don't create trusts just because they can. They create them for the people they love. To protect a child with a disability. To provide for a surviving spouse. To preserve assets for the next generation. Those goals haven't changed. The question is whether your current plan is still the best way to achieve them.

When I review a trust with a client, we don't look at one provision in isolation. We look at the whole picture: how the trust is drafted, what assets it owns, who it benefits, how it distributes income, and how new tax laws may affect the way it operates. That's exactly what an Initial Planning Session is designed to do.

Every trust is different because every family is different. There is no one-size-fits-all answer, and that's why there shouldn't be a one-size-fits-all review.

And the relationship doesn't end when your documents are signed. As the law changes and your life changes, your plan should evolve too. That's part of my commitment to every family I serve.

If your trust hasn't been reviewed since the One Big Beautiful Bill became law, now is the time.

Schedule a complimentary Initial Planning Session, and let's make sure your trust is still doing exactly what you built it to do. https://pages.20westlegal.com/book/planning-session

This article is a service of 20West Legal, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer an Estate Planning Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule an Estate Planning Session.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.

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