Trusts Face Surprise Double Taxation Under Trump's Big Beautiful Bill, Lawyers Warn

The One Big Beautiful Bill Act was billed as a windfall for top earners, but lawyers for the wealthy say they have uncovered a provision buried in the footnotes of a congressional tax guide that could result in double taxation for trusts and estates — and the consequences reach far beyond the ultra-wealthy.

The discovery came from a footnote in the Joint Committee on Taxation's Bluebook, the nonpartisan congressional document that explains newly enacted tax legislation. According to tax attorneys, the footnote indicates that the OBBBA's deduction limitation on top-earning individuals now applies to trusts and estates as well — a finding that caught the financial advisory community off guard.

Historically, trusts and estates have been permitted to deduct income distributed to beneficiaries, who then pay taxes on that income at the individual level. This distribution deduction exists precisely to prevent the same income from being taxed twice. The new interpretation, however, applies the OBBBA's itemized deduction cap to trusts and estates, meaning that a portion of distributed income could be taxed at both the trust level and the beneficiary level.

The implications are significant and surprisingly broad. While the steepest consequences fall on large dynasty trusts, attorneys emphasize that the provision affects trusts with as little as $16,000 in annual income. Dan Griffith, director of wealth strategy at Huntington Bank, pointed to $400,000 special-needs trusts as a category that would be directly impacted.

"There is potentially an element of double taxation," Griffith said. "This is something that is going to affect somebody with a $400,000 special-needs trust. It's not just going to be something that $100 million dynasty trusts suffer with."

For trusts that are required to distribute all of their income, the math becomes particularly punishing. These trusts face an impossible choice: sell assets to cover the tax bill, sacrificing future investment returns, or reduce distributions to beneficiaries — which may require court approval.

Justin Miller, national director of wealth planning at Evercore Wealth Management, called the provision a "mathematical nightmare." He offered the example of a wealthy couple intending to leave their estate to charity. If the trust must pay income taxes on a portion of its distributable income, less money flows to the charitable cause, which in turn affects the charitable deduction calculation, creating a compounding loop that Miller described as an unintended algebraic formula.

Robert Keebler, a lawyer who frequently sets up trusts for clients in second marriages, illustrated the practical impact. Consider a trust that distributes all $370,000 of its net income to a surviving spouse. Under the new deduction limit, the trust can only deduct $350,000 from its distributable net income. The remaining $20,000 would be subject to taxation at the trust level — even though the widow is taxed on the entire $370,000 at the individual level. To pay the trust-level tax, the trustee must either dip into the trust's corpus, eroding the children's eventual inheritance, or petition the court to reduce the spouse's distribution.

This provision applies to the current tax year, according to Keebler, giving advisors and families little time to adjust their planning.

The double taxation problem could be resolved through a congressional amendment or, more likely, through guidance from the Department of the Treasury. The Treasury Department did not respond to press inquiries by publication time. Miller said it is reasonable to hope that the Treasury will issue guidance by the end of the year, but the specifics of that guidance remain uncertain.

A critical open question is whether the Treasury will allow trusts to take unlimited deductions on income distributed to family beneficiaries — which would resolve the primary concern — or whether it will also apply the deduction limit to charitable giving by trusts and estates. The Bluebook's footnote mentions the distribution deduction but omits any reference to the charitable deduction, a silence that Miller interpreted as potentially intentional.

A person familiar with the JCT's procedures, speaking on condition of anonymity, told reporters that staff had interpreted the OBBBA as treating charitable deductions differently from other deductions. But until formal guidance arrives, advisors are left planning for the worst.

"We hope for the best but plan for the worst," Keebler said.

Miller echoed that sentiment: "We just need to know the rules. At the end of the day, advisors just want to do the correct thing. Right now, we don't know what that is."

What This Means For You: If you or your family benefit from a trust — whether it's a special-needs trust, a marital trust, or a charitable remainder trust — this provision could reduce distributions starting this tax year. The double taxation trap means less income reaches beneficiaries, and trust assets may need to be liquidated to cover unexpected tax bills. If you work with a financial advisor or estate attorney, now is the time to ask whether your trust structure is affected and whether any protective action should be taken before Treasury guidance arrives. Waiting for clarity could mean paying taxes you didn't anticipate on income that was already taxed once.