Essay
The Trust Exception Congress Deleted
What happens to a family trust when the safe harbor written into the statute simply stops being in the statute?
That is not a hypothetical. It is the quiet result of one drafting decision inside the One Big Beautiful Bill Act, and it may cost a surviving spouse and her children real money on a 2026 return while everyone involved is still celebrating a permanent estate tax exemption.
Renee Decker of DarrowEverett flagged the issue yesterday, working from the Joint Committee on Taxation’s General Explanation of the Act, the document practitioners call the Bluebook, published May 28. Her framing is right, and I think the statutory history makes the point sharper than the article does.
The rule: what Section 68 says now
Section 68 of the Internal Revenue Code is the overall limitation on itemized deductions. Public Law 119-21 did not amend it. It replaced it. The section was amended generally, meaning the old text was struck and new text was written in its place.
The new subsection (a) reads that in the case of an individual, itemized deductions are reduced by 2/37 of the lesser of the deductions themselves or so much of taxable income as exceeds the dollar amount where the 37 percent bracket begins. The policy is easy to describe: cap the benefit of an itemized deduction at 35 cents on the dollar instead of 37 for people in the top bracket.
Now the part that matters. Before the rewrite, Section 68 had six subsections. Subsection (e) was titled, in the Code’s own words, the exception for estates and trusts. Congress had said in plain text that this limitation does not reach a fiduciary entity. That subsection is not in the new version. It was not narrowed, not conditioned, not sunset. The rewrite arrived without it.
And Section 641(b) has said the same thing since 1954: the taxable income of an estate or trust shall be computed in the same manner as in the case of an individual, except as otherwise provided in this part. The express exception was the “otherwise provided.” Take it away and the default sentence in 641(b) does the work.
Why this lands on ordinary families, not just wealthy ones
For a person, the limitation is a top bracket problem. A married couple filing jointly does not reach the 37 percent bracket in 2026 until roughly $786,000 of taxable income.
A nongrantor trust reaches it at about $16,000.
That compression is not new. It has been the defining feature of fiduciary income taxation for decades, and every trust officer knows it. What is new is that a provision written for the wealthiest individuals in the country now attaches to a trust holding a widow’s income interest the moment it clears sixteen thousand dollars of taxable income.
The double count
Here is where it stops being an abstraction. Section 661 gives a trust a deduction for income it is required to distribute, and the beneficiary picks up that same income on her own return. That is the conduit: one dollar, one tax, paid by whoever ends up holding it.
The Bluebook treats the distribution deduction as an itemized deduction subject to Section 68. Run the arithmetic from the article on a trust with $386,000 of distributable net income, all of it required to go to a surviving spouse. Subtract the $16,000 threshold and you get $370,000. Two thirty sevenths of that is $20,000. The trust’s deduction falls from $386,000 to $366,000.
The spouse reports the full $386,000. The trust reports $20,000 of taxable income on money it no longer has.
So the trustee writes a check for tax on income that is already sitting in the beneficiary’s account. That check comes out of principal. Principal belongs to the remaindermen, who are usually the children of the deceased spouse. The trustee has just moved money from the children to pay a tax generated by the mother’s income interest, and the trust instrument almost certainly says nothing about it, because no drafter in 2019 was planning for this.
If you have ever sat in a room where a stepmother and adult children are already watching each other across a table, you know what that invoice looks like from their side.
The honest counterargument
The Bluebook is not law, and the case against this reading is genuinely strong.
A Bluebook is a post enactment staff explanation. It is persuasive authority at best, and the Supreme Court has never treated it as controlling over statutory text, regulations, or precedent. The conduit theory of fiduciary taxation is not a drafting convenience; it is the architecture of Subchapter J, reflected in decades of regulations and revenue rulings. Courts are slow to infer that Congress intended to tax the same dollar in two hands without saying so. And this reaches only nongrantor trusts. The revocable living trust most families actually have is a grantor trust during the grantor’s life, taxed to the grantor at individual rates, and nothing here touches it.
The most likely outcome is that Treasury issues guidance that restores the old result, or that the first taxpayer to litigate it wins.
But that is a prediction, and a trustee does not get to administer on a prediction.
The fiduciary read
The duty is not to be right about how this resolves. The duty is to know that it is open.
A trustee who reads the article, decides the Bluebook is wrong, and does nothing has not made a considered judgment. He has made a bet with someone else’s money and left no record of having thought about it. The defensible position is the boring one: identify which trusts under administration are nongrantor and mandatory income, model the exposure at 2/37 of income above the threshold, tell the income beneficiary and the remaindermen in the same conversation that a mismatch is possible and where the tax would be paid from, and put the analysis in the file. Many irrevocable trusts can be decanted or modified if the law hardens against them, and that option narrows the longer you wait.
Notice what changed and what did not. Congress made the estate tax exemption permanent, and most families correctly stopped worrying about the estate tax. The income taxation of trusts, which nobody put in a headline, quietly got worse. Relief in the part everyone watches is not relief in the part that actually governs the account.
I spent enough years being handed responsibility for things I did not write to have learned the same lesson twice. You do not get to assume the plan still says what it said the last time you read it. You go read it again, and you find out what changed while you were busy being reassured.
Section 68 changed. Go read it again.
Source: Hidden Tax Trap: Does OBBBA Affect Trusts and Estate Deductions? by Renee Decker, DarrowEverett LLP (JD Supra, August 11, 2026). Statutory text verified against the U.S. Code at the Cornell Legal Information Institute. Educational only. Not legal, tax, or investment advice.