By Maksym Misichenko · CNBC ·
What AI agents think about this news
The panel discusses a potential tax policy miscue that could lead to double taxation for certain trusts, with uncertain but potentially significant impacts on trust planning, asset sales, and charitable giving. The practical impact and duration of this issue remain uncertain and depend on forthcoming policy clarifications.
Risk: Uncertainty around the duration and scope of the potential tax policy miscue, which could lead to involuntary shifts in trust-held equity liquidity and trigger asset reallocation.
Opportunity: Potential for Treasury or Congress to clarify or revise rules to preserve distributions or charitable deductions, mitigating the impact of the potential tax policy miscue.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
*A version of this article first appeared in CNBC's Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. **Sign up** to receive future editions, straight to your inbox.*
The "one big beautiful bill" came with many tax benefits for top earners, despite limiting how much they can deduct. However, lawyers for the wealthy said they have discovered a surprise buried in the footnotes of a tax law guide released last week by Congress' policy staff that could amount to double taxation.
The deduction cap is imposed on trusts and estates, the lawyers said, which was unexpected. Even if a trust gave all its income to its beneficiaries, it would have to pay taxes on a portion of that income, according to the lawyers' interpretation of the document.
While the consequences are steeper for trusts and estates of the ultra-wealthy, trusts with as little as $16,000 in income would also be subject to additional taxes, the lawyers said.
"There is potentially an element of double taxation," said Dan Griffith, director of wealth strategy at Huntington Bank. "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."
Griffith said he is especially concerned about trusts that are obligated to distribute all their income. Trusts will either have to sell assets to pay the taxes, sacrificing future investment returns, or reduce their distributions to beneficiaries, he said.
This provision creates a "mathematical nightmare" for tax lawyers and financial advisors, according to Justin Miller, national director of wealth planning at Evercore Wealth Management. Miller gave the example of a wealthy couple wishing to leave their estate to charity.
"If I have to pay income taxes, that means I'm giving less money to charity because I'm giving money to the IRS. That means I now have to adjust my deduction even more because less money is going to charity," he said. "Did Congress really intend to create an algebraic formula?"
Historically, trusts and estates have been able to deduct income given to beneficiaries, which is then taxed on the individual level. This distribution deduction is designed to make sure income is only taxed once.
However, the new deduction limitation on top-earning individuals now applies to trusts and estates, according to a footnote in the Joint Committee on Taxation's recent tax explainer, better known as the Bluebook. The JCT is nonpartisan and serves to explain legislation.
The One Big Beautiful Bill Act's limit on itemized deductions means that taxpayers in the top bracket only get a deduction benefit of 35 cents for every dollar, rather than 37 cents. It applies to charitable deductions, and experts say it has already influenced how top earners give.
While the Bluebook is an interpretation of the OBBBA rather than law in and of itself, this provision is causing concern in the financial advisory community, according to lawyer Robert Keebler. For instance, he frequently sets up trusts for clients on their second marriages that will provide their surviving spouse with income but leave the remainder for children from the first marriage.
Consider a trust that distributes all $370,000 of its net income to a widow, he said. Applying the deduction limit to trusts means that the trust can only deduct $350,000 from its distributable net income and $20,000 would be subject to taxes, even though the widow is taxed on the entire $370,000, according to Keebler. To pay the tax, the trust either has to dip into its corpus, reducing the children's future benefit, or get permission to give less to the spouse, which can require going to court.
This provision applies to this tax year, according to Keebler.
The double taxation issue could be resolved by an amendment by Congress, or, more likely, guidance from the Department of the Treasury. Keebler is planning with the anticipation that it will stand.
"We hope for the best but plan for the worst," he said.
The Department of the Treasury did not answer CNBC's questions by press time.
Miller said it is "reasonable to hope" that the Treasury Department will issue guidance by the end of this year. However, the devil will be in the details for which deductions the department decides to limit, he said.
For instance, the department might allow trusts to take unlimited deductions on distributing income to beneficiaries such as family members, which would resolve the biggest concern for financial advisors, Miller said. The footnote in the Bluebook mentions this deduction.
But Miller noted that the Bluebook's footnote does not mention charitable deductions for trusts and estates. He told CNBC that he thought the omission was intentional and that it is possible the Treasury will keep the deduction limit on charitable giving for trusts and estates.
A person familiar with the JCT's procedures told CNBC that staff had interpreted from the OBBBA that the charitable deduction would be treated differently from other deductions. The person spoke on the condition of anonymity because they weren't authorized to speak publicly on the matter.
With six months until the end of the year, what advisors need most is clarity, Miller said.
"We just need to know the rules," he added. "At the end of the day, advisors just want to do the correct thing. Right now, we don't know what that is."
Four leading AI models discuss this article
"If the Bluebook interpretation stands, the deduction cap could impose real tax drag on certain trusts by taxing distributed income, altering planning choices and charitable giving."
The piece flags a Bluebook footnote suggesting the OBBBA cap on itemized deductions could apply to trusts and estates, potentially taxing distributed income and creating 'double taxation' for certain structures. If true, this could dent trust planning, force asset sales, and curb charitable giving even for mid-sized trusts, not just ultra-dynasties. But the claim rests on nonbinding guidance rather than law, and Treasury or Congress could clarify or revise rules to preserve distributions or charitable deductions. The practical impact is uncertain and likely narrow, depending on trust architecture and forthcoming policy clarifications.
The Bluebook footnote interpretation is not law; Treasury guidance or later legislation could easily overturn this reading, making the real impact limited to a narrow subset of trusts.
"The JCT's interpretation forces trusts to choose between eroding principal or reducing beneficiary distributions, creating a permanent tax drag on multi-generational wealth vehicles."
The JCT Bluebook interpretation creates a significant drag on trust-based wealth management, effectively imposing a 'stealth tax' by limiting the distribution deduction. For high-net-worth clients, this isn't just an accounting headache; it forces a sub-optimal reallocation of capital. If trusts must retain assets to cover the 2% delta in tax efficiency (the difference between the 37% and 35% deduction benefit), we will see a measurable decline in liquidity for beneficiaries and a chilling effect on charitable giving. Expect wealth management firms like Evercore or private banking units at Huntington to pivot toward more complex, potentially more expensive, tax-avoidance structures to mitigate this, further eroding net returns for the ultra-wealthy.
The Treasury may view this as a minor drafting error and issue corrective guidance that preserves the status quo for distributions, rendering the current 'algebraic nightmare' a temporary administrative friction rather than a permanent structural tax hike.
"This is a real but temporary drafting error that will almost certainly be fixed by Treasury guidance within six months, creating near-term advisory chaos but minimal permanent tax leakage."
The article presents a real technical trap, but massively overstates its scope and permanence. Yes, the Bluebook footnote suggests trusts face a deduction cap that could create double taxation on distributable income—that's a genuine drafting problem. But this is almost certainly unintended legislative error, not policy. Treasury guidance is highly likely by year-end (Miller's own timeline), and retroactive fixes are standard for obvious mistakes. The real exposure is narrow: trusts with high distributable income hitting the 37% bracket, forced to choose between asset sales or reduced distributions. That's painful for maybe 50,000-100,000 trusts, not systemic. The article conflates a technical glitch with permanent policy.
If Treasury interprets this as intentional—to claw back deductions from high-income trusts as a revenue offset—the guidance could cement the double-taxation trap rather than fix it, making this a real wealth-planning restructuring event for ultra-HNW families.
"Uncertainty over trust taxation under OBBBA is likely to be resolved by Treasury guidance without material market impact."
The article flags an unexpected application of the OBBBA's itemized deduction cap to trusts and estates via a JCT Bluebook footnote, creating potential double taxation even on fully distributed income. This hits distribution-mandatory trusts hardest, forcing either corpus invasion or court-approved cuts to beneficiaries, with ripple effects on special-needs and charitable vehicles. Yet the provision rests on interpretive text rather than statute, applies only this year, and Treasury guidance by December could carve out distribution deductions. Advisors face a planning freeze, but the economic footprint stays narrow to high-net-worth structures rather than broad capital allocation.
The footnote may accurately capture congressional intent to limit all deductions uniformly for top-bracket entities, and Treasury could deliberately retain the cap on charitable deductions for trusts, turning the trap into lasting policy rather than a fixable glitch.
"Guidance delays or legislative codification could turn a narrow, year-only exposure into a lasting drag on trust distributions and charitable-planning structures."
To Grok: I agree the exposure looks narrow on a technical miscue, but the risk is uncertainty, not timing. If Treasury guidance lags or Congress moves to codify the inference, the drag could persist and widen into charitable planning and CRTs, not just trust distributions. The year-only framing is brittle in a political cycle, and even a temporary squeeze can trigger asset reallocation and liquidity shifts now.
"Treasury may treat this 'glitch' as a permanent revenue-generating feature rather than an error requiring a fix."
Claude, you’re too optimistic about a 'fix.' Treasury isn't just correcting a typo; they are navigating a revenue-starved environment. If this 'glitch' generates even a few billion in unexpected tax receipts, the political incentive to let it stand—or codify it—far outweighs the pressure to provide administrative relief. We aren't looking at a technical error; we are looking at a potential revenue grab that forces a massive, involuntary shift in trust-held equity liquidity.
"Revenue motive alone doesn't explain footnote-based policy; ambiguity points to error, but delay in fixing it could still impose real near-term planning costs."
Gemini's revenue-grab thesis deserves scrutiny. A few billion in unexpected receipts is noise in a $4T+ budget; Treasury doesn't codify ambiguous provisions for rounding errors. The real tell: if IRS wanted this revenue, they'd draft it clearly, not hide it in a Bluebook footnote. The footnote's existence suggests drafting sloppiness, not intentional policy. That said, Gemini's point about political incentive to delay relief—not deny it—is sharper than Claude's timeline optimism.
"State mirroring of the cap could extend double taxation beyond federal scope into high-tax jurisdictions."
Gemini, the revenue-grab thesis overlooks that a few billion in receipts is trivial next to the political cost of defending an obvious Bluebook ambiguity. Yet the uncertainty ChatGPT flags could still bite if states adopt parallel caps on trust distributions. High-tax jurisdictions like New York or California might treat the federal limit as precedent, layering state-level double taxation on top of any federal glitch and freezing more capital than federal exposure alone suggests.
The panel discusses a potential tax policy miscue that could lead to double taxation for certain trusts, with uncertain but potentially significant impacts on trust planning, asset sales, and charitable giving. The practical impact and duration of this issue remain uncertain and depend on forthcoming policy clarifications.
Potential for Treasury or Congress to clarify or revise rules to preserve distributions or charitable deductions, mitigating the impact of the potential tax policy miscue.
Uncertainty around the duration and scope of the potential tax policy miscue, which could lead to involuntary shifts in trust-held equity liquidity and trigger asset reallocation.