A potentially significant tax issue is emerging for trusts and estates under the One Big Beautiful Bill Act. The short version [which my staff told me I needed to add], is that non-grantor trusts could be double taxed on a small part of their income starting in 2026.
Beginning in 2026, taxpayers in the highest federal income tax bracket will see the benefit of certain itemized deductions reduced under the new 2/37 limitation. In practical terms, deductions that once produced a 37% federal tax benefit may instead be limited to a 35% benefit.
For non-grantor trusts and estates this could be consequential because they reach the highest federal income tax bracket at a much lower level of taxable income. The concern is that deductions commonly used in trust and estate administration—including fiduciary fees, legal and accounting fees, charitable deductions, and possibly even income distribution deductions—could be affected depending on how the new rules are interpreted and applied.
One of the more troubling possibilities is that a trust and estates could distribute income to beneficiaries, yet still be left with taxable income at the trust level if the distribution deduction is limited. That result would be difficult to reconcile with the long-standing structure of trust taxation, which generally seeks to avoid taxing the same income twice. It could also complicate charitable planning and routine trust administration in ways that may not have been intended.
At first we thought this was an unintended result, although congress seems committed to the idea according to Footnote 102 of its 2026 Joint Committee on Taxation (JCT) Blue Book. Hopefully Congress, Treasury, or the IRS will enact a technical correction before fiduciaries and beneficiaries are forced to navigate unnecessary complexity and potentially unintended tax consequences.
This post is for general informational purposes only and is not intended as legal, tax, or financial advice. Readers should consult their own qualified advisors regarding their specific circumstances.