Legal Insights
When Public Law 119-21, commonly referred to as the One Big Beautiful Bill Act (“OBBBA”), was signed into law last year, most families breathed a sigh of relief. The law made the dramatically increased estate tax exemption permanent, seemingly putting estate tax worries to rest for most Americans. But on May 28, 2026, the Joint Committee on Taxation General Explanation of the OBBBA (commonly called the “JCT Bluebook”) stirred up trouble again, this time potentially affecting even those with modest trusts and estates.[1]
The culprit? A deduction limitation in Section 68 of the Internal Revenue Code (“IRC”) was designed to affect high earners, but, if the JCT Bluebook interpretation is followed by courts, the IRS and the Treasury, Section 68 could result in a loss of a portion of the deduction for distributions for some nongrantor trusts and estates.[2]
What Changed?
The OBBBA permanently amended the prior version of Section 68 to replace it with a new limitation on itemized deductions for high earners. In general terms, for those in the top bracket, the amended Section 68 reduces itemized deductions by 2/37ths (roughly 5.4%) of the lesser of:
- the taxpayer’s itemized deductions; or
- the taxpayer’s taxable income[3] exceeding the threshold for the 37% income tax bracket.
The policy behind the law seems straightforward: to reduce the deduction for taxpayers in the top federal bracket so that they receive a maximum deduction benefit of 35%, rather than 37%, for affected deductions.
For individuals, the rule is significant, but its impact is limited to high-income taxpayers. However, for estates and trusts, the impact is much broader because nongrantor trusts reach the top federal income tax bracket at very low-income levels compared with individuals. For 2026, the 37% bracket for estates and trusts begins at roughly $16,000 of taxable income, while individual thresholds are far higher, about $786,000 in 2026 for a married couple filing jointly. That means that trusts with a meager $16,001 in income could be subject to the same limitation meant only for top earners.
The Potential Effect: Double Taxation on Distributions, and Problems for the Trustee
While the prior version of Section 68 did not apply this limitation to estates and trusts in this manner, the JCT Bluebook states that the newly amended Section 68 does. To get there, it relies on Section 641(b), which provides that the taxable income of an estate or trust is generally computed in the same manner as taxable income of an individual.
More controversially, the JCT Bluebook states that estate and trust “itemized deductions” include, among other things, distribution deductions under Sections 651 and 661. Sections 651 and 661 generally allow trusts and estates to deduct certain distributions made to beneficiaries. Corresponding beneficiary inclusion rules appear in Sections 652 and 662. Thus, traditionally the beneficiary paid tax on the trust income distributed to the beneficiary and the trust got an equal distribution deduction. If the JTC Bluebook interpretation is applied and a trust’s distribution deduction is treated as an itemized deduction subject to Section 68, the trust may not receive a full deduction equal to the amount of the distribution and may have residual taxable income even after the distribution is made to the beneficiary.
The result could be a mismatch: the beneficiary reports the income, but the trust is denied part of the corresponding distribution deduction. Both the trust and the beneficiary pay tax on a portion of the trust income.
As a simplified example of the impact, let’s look at a nongrantor trust that earns $386,000 of distributable net income in 2026. For simplicity, we’ll ignore state taxes and other deductions, the trust’s income composition, etc. And we’ll assume our example trust requires all income to be distributed to the surviving spouse at least annually.
Under the old Section 68, the full $386,000 was treated as income to the spouse and an equivalent distribution deduction was taken by the trust. Under the JCT Bluebook interpretation of the amended Section 68, the trust’s distribution deduction is reduced by 2/37th of the amount treated as falling within the top federal bracket, or any amounts over the $16,000 threshold. The distribution deduction would therefore be reduced by $20,000, from $386,000 to $366,000 ($386,000 – $16,000 = $370,000; $370,000 x 2/37 = $20,000). The surviving spouse would report the full $386,000 as income, but the trust would only get a $366,000 deduction, resulting in $20,000 of residual taxable income for the trust. Both the trust and the surviving spouse pay tax on $20,000 of the trust’s income, which notably applies even though the trust no longer has income to pay these taxes.
Not only does this scenario mean higher tax, it also means greater potential for tension among the trustee and beneficiaries. If the trust must distribute income to the surviving spouse, but must pay additional tax from the principal, then the assets of the trust meant for other beneficiaries may need to be used to pay the income taxes; the remainder beneficiaries, perhaps the children of the deceased spouse, may object.
Why It’s Not Time to Panic
Even though the JCT Bluebook’s interpretation of the amended Section 68 is concerning, it is not time to get out your calculators and panic. First, although the JCT Bluebook may be relied on as persuasive authority, it is not statute and it is not binding Treasury guidance. It is simply a post-enactment staff explanation, which may be considered in technical tax matters. It does not override statutory text, regulations or controlling precedent.
Given the history of taxation of trust income, courts might be reluctant to infer Congress intended a double taxation or double-taxation-like result without direct language in the statute itself to support this conclusion. Our federal system of taxation of estates and trusts operates on “conduit theory of taxation,” which treats estates and trusts as pass-through entities for distributed income.[4] To part from this system would be a big shift in the law and policy that has been established through our tax code and likely require a more explicit indication that the shift was intended than the JCT Bluebook provides.
There are other reasons to challenge the JCT Bluebook’s assertion as inconsistent with Treasury Regulations and a host of Revenue Rulings, so this aspect of trust income taxation is far from settled.
This analysis also applies only to nongrantor trusts. Many of the trusts everyday Americans utilize are grantor trusts, at least during the lives of the grantors. Income for these trusts is taxed to the grantor at the grantor’s tax rate, avoiding the compressed trust bracket issues applicable to nongrantor trusts.
What You Should Know
If your estate plan includes a trust, you’re considering establishing one, or if you are a fiduciary, it is important to talk through these issues with tax counsel and accountants. A critical part of planning is balancing the issue of taxation, and the likelihood of a specific tax outcome, with other issues that may affect your family, wealth and business interests. There are a multitude of reasons to protect assets, such as orderly distribution outside of probate, protection of assets for minor or young adult children, protection of children in blended families, special needs planning, and asset sale restrictions, among other considerations. While tax outcomes should be part of the planning equation, the likelihood of a specific outcome should not be overstated in your planning considerations.
The opposite is also true—don’t assume estate tax relief means no tax concerns. While federal estate tax is no longer an issue for most families, income taxation of trusts remains and may potentially become a larger consideration. In many circumstances, even irrevocable nongrantor trusts can be amended or decanted to correct for changes of law. It’s important to monitor for future guidance or interpretations of trust income taxation going forward. Smart planning and ongoing professional guidance are more important than ever.
[1] The full Text of the JCT Bluebook can be found here.
[2] 26 USCS § 68
[3] Importantly, the taxable income for this prong is computed without regard to Section 68 and increased by the amount of itemized deductions.
[4] Private Letter Ruling 8721006 and Rev. Rul. 81-244
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