Trusts face surprise tax hit under Trump tax law, advisers say
Tax specialists say a congressional explanation of the law could limit deductions for trusts and estates, creating double taxation concerns.
By Daniel Okafor · Business Editor
4 min read
Tax advisers for wealthy families say a congressional explanation of President Donald Trump’s One Big Beautiful Bill Act points to an unexpected tax hit for trusts and estates. The issue matters because income distributed by a trust could be taxed at both the trust level and the beneficiary level, according to tax specialists cited by CNBC.
The concern comes from a footnote in the Joint Committee on Taxation’s Bluebook, a nonpartisan staff explanation of the law. Advisers told CNBC the document indicates that the law’s limit on deductions for top earners also applies to trusts and estates.
Under the long-running tax treatment described by advisers, trusts and estates generally can deduct income they distribute to beneficiaries. The beneficiaries then pay tax on that income, a structure meant to prevent the same income from being taxed twice.
The Bluebook’s interpretation has raised concern because it appears to limit that distribution deduction, according to the advisers. If that reading holds, a trust that sends all its income to beneficiaries could still owe tax on part of the income it no longer holds.
Advisers see broad effects
Dan Griffith, director of wealth strategy at Huntington Bank, told CNBC the issue could create double taxation and would not be limited to very large family trusts. He said trusts with as little as $16,000 of income could face added tax, and he pointed to special-needs trusts as one area of concern.
Griffith said trusts required to distribute all income may face difficult choices. They could sell assets to cover taxes, which may reduce future investment gains, or lower payments to beneficiaries, according to his analysis.
Justin Miller, national director of wealth planning at Evercore Wealth Management, told CNBC the provision could create difficult calculations for lawyers and financial advisers. He gave the example of a couple planning to leave an estate to charity: if the estate must pay income tax, less money goes to charity, which then changes the deduction calculation.
The One Big Beautiful Bill Act limited the value of itemized deductions for taxpayers in the top bracket. CNBC reported that those taxpayers now receive a 35-cent tax benefit for each dollar deducted, rather than 37 cents, and that the limit applies to charitable deductions.
One example shows the dispute
Robert Keebler, a certified public accountant, told CNBC the issue is already affecting planning for trusts used in second marriages. Those trusts can provide income to a surviving spouse while preserving remaining assets for children from an earlier marriage.
Keebler described a trust distributing $370,000 in net income to a widow. Under the disputed interpretation, the trust could deduct only $350,000, leaving $20,000 subject to tax even though the widow would be taxed on the full $370,000, he told CNBC.
To pay that tax, the trust may have to use principal that otherwise would go to the children, Keebler said. Another option could be reducing the spouse’s distribution, which may require court approval, according to his account.
Keebler told CNBC the provision applies to the current tax year. He said he is planning as though the interpretation will remain in place, while hoping it is changed.
Treasury guidance could settle the issue
Advisers told CNBC the problem could be fixed by Congress through an amendment or by the Treasury Department through guidance. CNBC reported that the Treasury Department did not respond to its questions before publication.
Miller said advisers are hoping for Treasury guidance before year-end. He told CNBC the key question is which deductions Treasury will treat as limited.
One possible outcome, Miller said, is that Treasury allows full deductions when trusts distribute income to family beneficiaries. That would address the main worry for advisers, he told CNBC, because the Bluebook footnote mentions the distribution deduction.
Charitable deductions may be treated differently. Miller told CNBC the footnote does not mention charitable deductions for trusts and estates, and he believed that omission may have been deliberate. A person familiar with Joint Committee on Taxation procedures told CNBC that staff read the law as treating charitable deductions differently from other deductions; CNBC said the person was not authorized to speak publicly.
This story draws on original reporting from CNBC.