The New Tax Law and Your Family Trust: What You Need to Know
A client recently forwarded us a CNBC article with a simple question:
"Does this affect our trust?"
It was a fair question.
The article discussed a provision buried in the One Big Beautiful Bill that some tax attorneys and accountants believe could create unintended tax consequences for certain trusts. The concern wasn't immediately obvious when the law passed. Instead, it emerged through commentary in the Joint Committee on Taxation's explanatory materials released afterward.
Our honest answer was:
Maybe.
The law is new, tax professionals are still analyzing its impact, and additional guidance from the U.S. Treasury is expected. Even so, there is enough uncertainty that families with trusts should understand what is being discussed and determine whether a review of their planning makes sense.
Here's what we know today.
What the New Law Was Intended to Do
For many families, the headline from the One Big Beautiful Bill was welcome news.
Beginning in 2026, the federal estate tax exemption increases to $15 million per person, or $30 million for a married couple with proper planning. Unlike previous versions of the law, this increase is not currently scheduled to sunset.
For families with larger estates, this expanded exemption may significantly reduce future federal estate tax exposure.
That provision received considerable attention.
Another provision did not.
While the estate tax exemption affects a relatively small percentage of families, tax professionals are closely watching a separate rule that could affect certain trusts established for very practical reasons—including trusts created to care for a surviving spouse or a loved one with special needs.
The takeaway: The higher estate tax exemption is good news for many families. But another, lesser-known provision may deserve attention if you have a trust that distributes income.
The Provision Tax Professionals Are Watching
The One Big Beautiful Bill introduced a new limitation on certain tax deductions for high-income taxpayers.
Some tax professionals believe that limitation may also apply to trusts and estates.
Why does that matter?
Because trusts reach the highest federal income tax bracket much sooner than individuals do.
For 2026:
A trust reaches the 37% federal income tax bracket at approximately $16,000 of taxable income.
A single individual generally does not reach that same bracket until income exceeds approximately $640,000.
As a result, even a relatively modest trust could be treated differently than many people would expect.
The concern centers on how trusts have historically been taxed.
Traditionally, when a trust distributes income to a beneficiary, the trust generally receives a deduction for that distribution, while the beneficiary reports the income on their own tax return. In other words, the income is generally taxed once.
Some tax professionals believe the new deduction limitation could reduce the amount a trust is allowed to deduct in certain circumstances.
If that interpretation ultimately proves correct, a portion of income distributed by a trust could potentially remain taxable to the trust while also being taxable to the beneficiary.
For example, imagine a trust that distributes income to a surviving spouse, as required by its terms. If the trust cannot deduct the full amount distributed, part of that income could remain taxable at the trust level even though the surviving spouse is already paying tax on the full distribution.
That possibility is what has generated concern among estate planning attorneys, CPAs, and trust professionals.
It is important to emphasize that this interpretation has not yet been confirmed by Treasury guidance. Additional clarification may ultimately limit—or eliminate—this concern for many trusts.
The takeaway: Some tax professionals believe a provision in the new law could change how certain trusts are taxed. Whether and to what extent that ultimately happens will depend on future Treasury guidance.
Who May Be Affected by This Change?
This isn't simply an issue for very large estates.
In fact, many of the professionals raising concerns about this provision point out that it could affect trusts established for very practical family reasons—not just multi-million-dollar estates.
Examples include:
Special Needs Trusts
Families often create special needs trusts to provide financial support for a loved one with a disability while helping preserve eligibility for certain government benefits.
If these trusts generate taxable income and distribute it according to their terms, they could be affected if the deduction limitation ultimately applies as some professionals expect.
Trusts for a Surviving Spouse
Many married couples use trusts to provide income for a surviving spouse while preserving the remaining assets for children or other beneficiaries.
If those trusts are required to distribute income each year, the trust's tax treatment could change depending on how Treasury ultimately interprets the new law.
That may affect:
Annual trust income
Distribution strategies
Overall tax efficiency
Irrevocable Trusts That Generate Taxable Income
Some irrevocable trusts—including certain life insurance trusts that own income-producing investments—may also warrant review if they generate taxable income.
Not every irrevocable trust will be affected.
The important question is whether the trust earns taxable income and how that income is distributed.
Not Every Trust Faces the Same Risk
One important point often gets overlooked.
Not every trust works the same way.
Some trusts are required to distribute income every year.
Others give the trustee discretion over when and how distributions are made.
That flexibility may provide additional planning opportunities depending on how Treasury ultimately interprets the law.
This is one reason blanket answers rarely work in estate planning.
Every trust should be evaluated based on:
Its purpose
Its distribution requirements
The assets it owns
The people it was designed to protect
The takeaway: Families with trusts that regularly distribute income—particularly special needs trusts and trusts created for surviving spouses—may benefit from reviewing their planning sooner rather than later.
What We Know—and What We Don't Know Yet
At this point, one thing is important to understand:
The concern being discussed comes from the Joint Committee on Taxation's Bluebook, which explains how Congress understands the legislation.
It is not the statutory language itself.
Treasury regulations and IRS guidance still need to clarify exactly how this provision will be administered.
That means several outcomes remain possible.
Future guidance could:
Clarify that the concern is limited to specific types of trusts.
Narrow the provision's application.
Confirm the broader interpretation many tax professionals are currently discussing.
Right now, no one knows with certainty.
That's why many estate planning attorneys are taking a practical approach:
Hope for clarification—but review existing plans now so families have options if changes become necessary.
Waiting until the end of the year—or until tax returns are being prepared—may unnecessarily limit those options.
The takeaway: We don't yet have every answer. But reviewing your trust now gives you time to respond thoughtfully if future guidance confirms that changes are needed.
What You Can Do Right Now
If you already have a trust, this isn't a reason to panic.
It is a good reason to review your plan.
Questions worth asking include:
What type of trust do I have?
Does it generate taxable income?
Is it required to distribute income each year?
Who depends on those distributions?
Does the trust still accomplish the goals it was originally created to achieve?
In some cases, no changes may be necessary.
In others, distribution strategies, trust administration, or other planning techniques may deserve another look.
The important thing is understanding your options while you still have flexibility.
Most families created trusts for very personal reasons:
To provide for a surviving spouse.
To protect a child with special needs.
To preserve assets for future generations.
Those goals haven't changed.
The question is simply whether the current structure remains the best way to accomplish them under evolving tax rules.
Why This Belongs in Your Estate Plan—Not Just Your Tax Return
At first glance, the widow penalty or a change in trust taxation may seem like a tax issue.
But the decisions that influence those outcomes are often made years before a tax return is ever filed.
That's why we see this as an estate planning issue.
A traditional estate plan often focuses on what happens to your assets after death. A comprehensive Life & Legacy Plan® looks further. It considers what life will actually look like for the surviving spouse and the people you love after you're gone.
That means asking questions such as:
Which assets will the surviving spouse rely on first?
How will retirement account distributions affect their taxable income?
Could future distributions trigger higher Medicare premiums?
Would Roth conversions make sense while both spouses are still living?
Is the trust still structured in the most effective way under current law?
These conversations rarely happen in isolation.
While financial advisors, CPAs, and attorneys each bring valuable expertise, families often discover that those professionals have never sat down together to coordinate the overall plan.
As a result, well-intentioned planning can become disconnected planning.
One professional may recommend a tax strategy without knowing how the trust is drafted. Another may update estate documents without considering retirement income or Medicare implications.
Our role is to help ensure those conversations happen together—not separately.
When everyone is working from the same plan, the people you love are better protected.
Why Ongoing Reviews Matter
One of the biggest misconceptions about estate planning is that once documents are signed, the work is finished.
In reality, laws change.
Tax rules evolve.
Families grow.
Assets change.
The plan that made perfect sense five years ago may no longer accomplish what you intended today.
That's why we believe estate planning isn't a one-time transaction.
It's an ongoing relationship.
As laws change, we review how those changes may affect your plan and help you determine whether adjustments are appropriate.
Sometimes nothing needs to change.
Sometimes small updates can make a meaningful difference.
Either way, you're making decisions based on current information—not outdated assumptions.
How We Can Help
At Starsia Law, we believe estate planning is about much more than preparing legal documents.
It's about helping your family make informed decisions before life changes force difficult ones.
Through our Life & Legacy Planning® process, we work with you to understand not only your assets, but also your goals, your family dynamics, and the practical realities your loved ones may face in the future.
When appropriate, we coordinate with your CPA, financial advisor, and other trusted professionals so your legal, tax, and financial planning work together—not independently.
If you've created a trust, we'll help you understand:
How it's structured
Whether it still reflects your goals
Whether changes in the law may affect how it operates
What opportunities may exist to strengthen your plan
Most importantly, we continue reviewing your plan as life changes so it remains aligned with your family's needs and current law.
If your trust hasn't been reviewed since the One Big Beautiful Bill became law, now is a good time to revisit it.
Schedule a complimentary 15-minute discovery call to learn how we can help ensure your trust continues to do exactly what you created it to do—protect the people you love.
This article is a service of Starsia Law, 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.
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.