The New Tax Law and Your Family’s Trust: What to Know Now

Last week, a client shared a CNBC article with us, asking, “Does this impact our trust?”

This was a valid inquiry. The article highlighted a provision hidden within the One Big Beautiful Bill, which tax professionals are referring to as a double taxation issue for trusts. This detail was discovered in a footnote of a Congressional tax guide that was published after the law’s enactment.

So, does it affect her trust? It could. Here’s what we currently understand.

What the Law Was Intended to Achieve

Upon the signing of the One Big Beautiful Bill, the main focus for families was the increase in the estate tax exemption. Beginning in 2026, this exemption will rise to $15 million for individuals and $30 million for couples, with no planned expiration. For families who have been monitoring this figure, it’s certainly positive news.

This aspect received widespread coverage. However, another important provision did not.

In summary: The increase in the exemption is significant and beneficial for certain families. Yet, within the same legislation lies a provision that impacts a much larger audience, including families with smaller trusts they established for practical purposes.

The Hidden Provision in the Footnotes

The One Big Beautiful Bill has introduced a new limitation on deductions for high-income individuals. This rule restricts the benefits certain taxpayers can receive from deductions once they enter the highest income tax bracket.

Tax lawyers and accountants have found that this limitation now seems to extend to trusts and estates as well.

This is significant because trusts reach the top income tax bracket much sooner than individual taxpayers. In 2026, a trust will hit the 37 percent tax rate at around $16,000 in taxable income, while a single individual won’t face that rate until their income surpasses $640,600.

As a result, a modest family trust earning $16,000 in income could now be subjected to the same deduction limitations intended for the nation’s highest earners.

The implications are clear. Traditionally, when a trust distributes income to a beneficiary, it deducts that distribution, and the income is taxed only once at the beneficiary’s level. However, under this new rule, that may no longer hold true.

Here’s how it breaks down. The One Big Beautiful Bill limits the deduction benefit for taxpayers in the top bracket to 35 cents on the dollar instead of 37 cents. This same cap now seems to apply to trusts as well. For instance, if a trust is required to distribute $370,000 in income to a surviving spouse, under the new limitation, it may only be able to deduct $350,000 of that distribution. Consequently, the trust would owe taxes on the remaining $20,000, even though the spouse is also taxed on the entire $370,000 she received. To manage this tax burden, the trust might have to draw from its principal or seek a court order to reduce the amount it pays her. Neither of these options aligns with the trust’s original purpose.

In summary, a provision that many families may be unaware of could be leading to a double taxation issue within trusts that were functioning as intended prior to the law’s amendment.

Who This Affects

This issue isn’t limited to just large estates. The advisors who are raising this concern are particularly highlighting families with smaller trusts.

One wealth advisor shared with CNBC: “This is a situation that will impact someone with a $400,000 special needs trust. It’s not only the $100 million dynasty trusts that will be affected.”

Special needs trusts. If you have a child with a disability and a trust set up to safeguard their government benefits, that trust might now encounter this restriction. The trust could be liable for taxes on income it distributed to your child, while your child is also taxed on that same income.

Trusts for a surviving spouse. Many families establish trusts to provide income for a surviving spouse while keeping the principal intact for their children. If that trust is required to distribute its income, it now faces a significant challenge: it may owe taxes on income that the spouse has already been taxed on, and settling that tax bill could mean selling assets or returning to court to lower her distributions.

Life insurance trusts. Irrevocable trusts that hold life insurance policies are a widely used planning strategy. If that trust produces taxable income, the new limitation could potentially come into play.

The common theme here is any trust that allocates income to someone who relies on it. The trusts that are most vulnerable are those required to distribute their income, such as QTIP trusts for surviving spouses, special needs trusts, and irrevocable life insurance trusts that produce taxable income. Trusts that have more flexibility in distribution might have additional options based on how Treasury guidance ultimately unfolds.

Additionally, this provision pertains to income generated in 2026, which means for some families, this situation is already in progress.

In summary: If you possess a trust that distributes income to a beneficiary, this provision could influence the trust’s performance. Families that are most at risk are those whose trusts were established to support someone: a child with a disability, a surviving spouse, or a dependent who relies on those distributions.

What We Know and What Remains Unclear

This provision originates from a footnote in the Joint Committee on Taxation’s Bluebook, which serves as Congress’s own interpretation of the law. It is not the law itself. Guidance from the Treasury Department could address the double taxation issue or clarify which trusts are impacted and in what manner.

Advisors monitoring this closely are hopeful for that guidance. They are also preparing as if the issue may not be fully resolved.

“We hope for the best but plan for the worst,” a tax attorney shared with CNBC.

What is evident: the provision is applicable to this tax year. Delaying action while waiting for certainty is not a neutral stance if your trust is already producing income that could be affected by it.

The key takeaway: Guidance from the Treasury could help clarify or lessen the impact. However, it hasn’t been received yet. It’s wise to start planning now, before the year wraps up. We are keeping a close eye on the guidance from the Treasury Department. Once it arrives, we will reach out to every client whose trust might be influenced. This guidance could either completely alleviate concerns for family trusts, limit them to charitable contributions, or confirm the double taxation issue universally. You won’t need to seek us out for updates.

What You Can Do Right Now

If you have a trust, now is the time to ensure it continues to function as you intended.

This begins with understanding the type of trust you have, the income it generates, and who relies on its distributions. Some trusts can be restructured, and distribution strategies can sometimes be modified. In certain situations, a different approach may better achieve the original goals under the new regulations than the current setup.

What we can share is that families established their trusts for significant reasons: to safeguard a child with a disability, to support a surviving spouse, or to ensure that the right individuals receive what they need when they need it. The new law does not alter those objectives; it raises the question of whether the structure you selected to meet them still accomplishes that.

When we collaborate with families on this, we consider the entire picture: the trust itself, its contents, its beneficiaries, and how the new regulations interact with its original setup. This is precisely the type of discussion a Life & Legacy Planning Session is designed for.

This isn’t a generic review. Your trust was created for your family’s unique reasons, and that’s how we approach it.

The relationship doesn’t conclude once the documents are signed. When something arises, your family knows to reach out to us.

If your trust hasn’t been reviewed since the One Big Beautiful Bill was enacted, it’s time for that review to take place.

Schedule a complimentary 15-minute consultation to learn more.

This article is a service of Kristen Wong of Seasons Estate Planning, APC, 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 a Life & Legacy 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 a Life & Legacy 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.