Effective for tax years beginning after December 31, 2025, recent tax law changes under Internal Revenue Code §68 may impact trust deduction limitations.
While the provision was intended to limit the tax benefit of certain itemized deductions for high-income taxpayers, it may have significant implications for trusts and their beneficiaries.
At this point, the IRS has not issued guidance addressing how the new rules apply to trusts and estates. As a result, trustees, beneficiaries, and advisors should be aware of the potential implications as they prepare for 2026.
Why It Matters
Under one interpretation of the new law, certain deductions commonly claimed by trusts—including deductions related to distributions to beneficiaries—could be subject to limitation.
If that interpretation ultimately prevails, a trust could distribute all of its income to beneficiaries and still have taxable income remaining at the trust level. In other words, a trust may distribute all available cash but still owe income tax because a portion of its deduction is reduced under §68.
As trustees prepare for 2026, reviewing the potential impact of trust deduction limitations on estimated tax payments, distribution policies, and cash reserves will be important.
Potential Impact on Beneficiaries
The primary concern is that trust income could be taxed in a way that was not anticipated under prior law. Traditionally, trust income distributed to beneficiaries has generally been taxed once, either at the trust level or the beneficiary level. If certain trust deductions are reduced under the new rules, a portion of that income could remain taxable to the trust even after distributions have been made.
The uncertainty may be even greater for families that utilize multiple trust layers, such as dynasty trusts, marital trusts, or other complex estate planning structures. As income moves from one trust to another before ultimately reaching a beneficiary, the impact of the deduction limitation could potentially compound.
While many technical questions remain unanswered, tax professionals have expressed concern that the result could increase the overall tax burden on trusts and beneficiaries.
Planning for 2026 Taxes and Looking Ahead
The uncertainty surrounding §68 creates an immediate planning challenge, particularly because trusts reach the highest federal income tax bracket at much lower income levels than individual taxpayers.
Trusts that historically distributed all income and paid little or no federal income tax may need to revisit their 2026 estimated tax calculations and cash flow needs.
Trustees should consider:
- Potential trust-level tax liabilities beginning in 2026
- Estimated tax payment requirements
- Distribution policies and cash reserves
- The impact on beneficiaries receiving trust distributions
- Existing trust structures that involve multiple trusts
Maxwell Locke & Ritter is actively monitoring developments related to trust deduction limitations under §68 and will continue to provide updates as additional guidance becomes available.
