On July 4, 2025, President Trump signed the One Big Beautiful Bill Act into law. Among its many provisions — higher estate tax exemptions, expanded SALT deductions, new savings accounts for children — the Act also introduced a limitation on itemized deductions for top-bracket taxpayers. That provision, by itself, was not particularly surprising. What happened next was.
In its 2026 "Blue Book" explanation of the Act, the Joint Committee on Taxation (JCT) included a footnote that has sent estate planners and fiduciary advisors scrambling. According to the JCT, the new deduction limitation applies to trusts and estates — and it classifies the distribution deductions under Internal Revenue Code Sections 651 and 661 as "itemized deductions" subject to the cap. If that interpretation holds, it creates a double-taxation problem that could affect virtually every trust that distributes income to beneficiaries.
This article explains what happened, who is affected, what it means for common estate planning structures, and what you should be thinking about right now. This is general information, not legal advice — every trust is different, and any changes to your estate plan should be made in consultation with qualified counsel.
How Trust Taxation Has Traditionally Worked
To understand why this matters, you need to understand how trusts have been taxed for decades. A trust is a separate taxpayer. It files its own return (Form 1041) and is subject to its own rate schedule — one that reaches the top 37% federal bracket at just $16,550 in taxable income for 2026. That compressed rate schedule is intentional: Congress did not want trusts to be used as income-splitting vehicles.
To prevent income from being trapped at those high rates, the tax code has always allowed trusts a distribution deduction under Sections 651 and 661. When a trust distributes income to a beneficiary, the trust deducts it, and the beneficiary reports it on their individual return. The income is taxed once — at the beneficiary's rate. This is the fundamental architecture of Subchapter J, and it has worked this way since the Internal Revenue Code was restructured in 1954.
What the JCT Footnote Changes
The One Big Beautiful Bill Act introduced a new deduction limitation that reduces itemized deductions by 2/37ths of the lesser of (a) total itemized deductions or (b) the amount by which taxable income exceeds the start of the 37% bracket. For individuals, this is a relatively modest haircut. For trusts, where the 37% bracket begins at $16,550, the math gets ugly fast.
The JCT's Blue Book states that, for purposes of this limitation, the "itemized deductions" of a trust include the distribution deductions under Sections 651 and 661 and the personal exemption under Section 642(b). This is a significant departure from how these deductions have been understood. Treasury Regulation 1.67-4(a)(1)(ii) has long indicated that distribution deductions are not itemized deductions under Section 63(d). The JCT argues that regulation was limited to the context of Section 67(e) and does not control here.
If the JCT's interpretation stands, here is what happens: A trust distributes all of its income to a beneficiary. Under the new limitation, the trust cannot fully deduct that distribution. The trust pays income tax on the portion it cannot deduct. The beneficiary also pays income tax on the full distribution. The same dollar of income is taxed twice.
Who Is Affected
The scope of this issue is broader than most people realize. Because trusts hit the 37% bracket at just $16,550, this is not a problem reserved for dynasty trusts and the ultra-wealthy. Any trust with more than roughly $16,000 in distributable net income is potentially in the crosshairs. That includes:
Revocable living trusts that become irrevocable upon the grantor's death — the most common estate planning vehicle in Washington — are affected once they begin distributing income to surviving spouses or other beneficiaries. Charitable remainder trusts (CRTs and CRUTs) that make required annual payments to income beneficiaries face the additional complexity of determining whether the charitable deduction under Section 642(c) is also subject to the limitation. Special needs trusts that make distributions for the benefit of disabled beneficiaries may see their tax burden increase, reducing the resources available for the very person the trust was created to protect. Trusts for surviving spouses — including QTIP trusts, which are required to distribute all income to the surviving spouse — are in a particularly difficult position because the trustee has no discretion to retain income to manage the tax hit.
The Charitable Trust Problem
The issue is especially acute for charitable giving structures. If a trust must pay income tax on a portion of its distributions because of the deduction limitation, the amount available for charitable purposes decreases. But reducing the charitable distribution in turn reduces the charitable deduction, which changes the limitation calculation, which changes the tax owed, which changes the amount available for distribution. Tax advisors have described this as an "algebraic nightmare" — a circular calculation that may require iterative computation to resolve.
For clients who have established charitable remainder trusts as part of their estate plans — including those who followed the CRUT-DAF combination strategy I discussed in my earlier article on managing capital gains — this development requires immediate attention. The economics of these structures were modeled on the assumption that distributions would be fully deductible at the trust level. If that assumption no longer holds, the after-tax results could be materially different from what was projected.
What We Are Waiting For
The JCT Blue Book is influential but not binding law. It represents the JCT staff's interpretation of what Congress intended, but it does not carry the force of a Treasury regulation or IRS ruling. The Department of the Treasury has not yet issued formal guidance on whether — and how — the deduction limitation applies to trust distribution deductions.
There is reason for cautious optimism that Treasury may narrow the JCT's interpretation, at least with respect to distributions to individual beneficiaries. The distribution deduction has been a structural feature of trust taxation for over 70 years, and reading it as an "itemized deduction" subject to limitation would be a fundamental change to how Subchapter J operates. Several prominent tax policy organizations, including the New York State Bar Association's Tax Section, have already written to Treasury urging clarification.
However, there is less optimism regarding charitable deductions. The JCT footnote did not explicitly exclude them, and the legislative history does not suggest Congress intended to exempt charitable distributions from the limitation. Until Treasury speaks, the safest assumption for planning purposes is that the limitation may apply to both beneficiary distributions and charitable deductions at the trust level.
What You Should Do Now
If you have an existing trust — or if you are in the process of establishing one — here are the steps I recommend:
Review your trust's income and distribution patterns
If your trust distributes income to beneficiaries, ask your tax advisor to model the potential impact of the deduction limitation on this year's return. Even a modest trust generating $50,000 in income could see a meaningful tax increase if the distribution deduction is partially disallowed. Understanding the exposure now — before year-end — gives you time to evaluate alternatives.
Evaluate whether discretionary distributions should be adjusted
For trusts that give the trustee discretion over distributions, it may make sense to reconsider the timing and amount of distributions in light of the potential limitation. Retaining income at the trust level and investing for growth (rather than distributing it and losing a portion of the deduction) may produce a better after-tax result in some cases. This requires careful analysis — the trust's compressed rate schedule means retained income is taxed at high rates, so the comparison is not straightforward.
Reassess charitable giving structures
If you have a charitable remainder trust, donor-advised fund strategy, or any structure that relies on a charitable deduction at the trust level, ask your advisor to rerun the projections under the assumption that the deduction may be limited. The difference between the original projection and the revised number will tell you whether the structure still achieves your goals or whether modifications are needed.
Consider the interaction with Washington State taxes
Washington's new 9.9% income tax (effective 2028) and its capital gains tax add another layer of complexity. If a trust is domiciled in Washington and subject to the state income tax on undistributed income, the combination of federal double taxation and state taxation could produce effective rates that are significantly higher than what clients expected when they established their trusts. For some clients, reviewing the trust's situs — its legal home state — may be worthwhile. States like Nevada, South Dakota, and Delaware offer trust-friendly tax environments that may mitigate some of the federal-level impact.
Do not make hasty changes
This is an area where Treasury guidance could change the landscape significantly. Unwinding or restructuring a trust based on a JCT interpretation that may ultimately be narrowed or rejected would be premature. The right approach is to understand your exposure, model the scenarios, and be ready to act when Treasury provides clarity — not to restructure your entire estate plan based on a footnote that may not survive formal rulemaking.
The Bigger Picture
The One Big Beautiful Bill Act did many things that are genuinely beneficial for estate planning. The permanent $15 million estate and gift tax exemption ($30 million for married couples) provides long-term certainty that the estate planning community has been waiting for since the 2017 Tax Cuts and Jobs Act introduced the higher exemption on a temporary basis. For most families, the higher exemption means federal estate tax is no longer a primary concern.
But the trust taxation issue is a reminder that major legislation always has unintended consequences — and that the details matter as much as the headlines. Whether this particular interpretation survives Treasury rulemaking remains to be seen. In the meantime, the prudent course is awareness, analysis, and preparation.
If you have questions about how the One Big Beautiful Bill Act affects your estate plan, your trust, or your charitable giving structures, I am happy to discuss your specific situation. You can reach me at (253) 564-1856 or through the contact page on this website.
