The New Tax Law and Your Family's Trust: What to Know Now
The updated tax law may create a hidden double-tax problem for many common family trusts, especially those meant to care for a spouse, child with a disability, or other loved one who depends on trust income.
A quick story from our office
Not long ago, a client in Northern Kentucky sent us a national news article with a simple question: “Does this affect our trust?” If you are asking yourself the same thing, you are not alone. Families across Northern Kentucky and the Cincinnati area are just now hearing about a little‑noticed twist in the new tax law that could change how their trusts work in real life.
The short answer: it might affect you, and if you have a trust that distributes income to someone you love, this is the year to take a fresh look.
What the new law was trying to do
When Congress passed its latest “big” tax bill, most of the headlines focused on the good news for larger estates: beginning in 2026, the federal estate tax exemption is scheduled to jump to roughly 15 million per person, or 30 million for a married couple. For a small percentage of families, that higher exemption will make it easier to keep family wealth out of federal estate tax.
But there was a second change, tucked away in the fine print, that did not make the front page. That change doesn’t just touch ultra‑wealthy families with $30 million estates; it reaches into very ordinary, practical trusts that folks set up every day here in Boone, Kenton, Campbell, and Hamilton Counties.
In other words, the “good news” on estate taxes does not automatically mean your existing trust plan is in the clear.
The hidden footnote that hits trusts
As part of the new law, Congress limited how much benefit certain high‑income taxpayers can get from some deductions once they reach the top income tax bracket. On paper, that looks like a rule aimed at very high earners.
Here is the catch: trusts and estates appear to be pulled into that same limitation. And trusts hit the top tax bracket much faster than individual people do.
In 2026, a trust reaches the top 37% bracket at around 16,000 in taxable income.
A single individual does not hit that same 37% rate until income is over 640,000.
So a modest family trust that earns about 16,000 in income can be treated like one of the country’s highest earners for this deduction rule. That is where the double‑tax concern comes in.
Traditionally, if a trust earned income and then distributed that income to a beneficiary, the trust took a deduction for what it paid out, and the beneficiary paid the tax on what they received. One dollar of income was taxed one time, at the beneficiary’s level.
Under this new limitation, the trust may no longer get a full deduction for all the income it is required to distribute. The law caps the deduction benefit at 35 cents per dollar instead of 37 cents for taxpayers in the top bracket, and that appears to include many trusts.
Here is a simplified example based on the way professionals are modeling this:
A trust must distribute 370,000 of income to a surviving spouse under the terms of the trust.
Because of the cap, the trust may only be able to deduct 350,000 of that distribution.
The spouse reports and pays tax on the full 370,000 she receives.
The trust may still owe tax on the “extra” 20,000 that it could not deduct.
To pay that bill, the trust either has to dip into principal that was meant to be preserved for children or other heirs, or the family has to go back to court and ask to reduce what the spouse receives. That is the opposite of what most families thought they were building when they set up these trusts.
For many local families, this means a trust that was working exactly as intended before the law changed may now be exposed to a quiet, ongoing double tax.
Who is most at risk
This is not just a “big city, billionaire” problem. Advisors watching this closely are specifically worried about what it means for modest, hardworking families. One wealth advisor put it this way: this is the kind of change that can affect a 400,000 special needs trust, not just a 100‑million “dynasty” trust.
Here are the types of trusts we are most concerned about in Northern Kentucky and Cincinnati:
Special needs trusts. If you have a child or adult family member with a disability, and you set up a trust to protect their eligibility for SSI or Medicaid while still providing extras, that trust may now face this deduction limitation. The trust could owe tax on income it distributed, while your child is also paying tax on that same income.
Trusts for a surviving spouse. Many couples set up a trust that must pay all income to the surviving spouse each year, while preserving the principal for children or grandkids. Now, that trust may owe tax on income the spouse already paid tax on, and the only way to cover it may be selling assets or heading back to court to reduce what the spouse receives.
Irrevocable life insurance trusts (ILITs). If you have an ILIT holding life insurance and the trust earns taxable income (for example, from side investments or cash sitting in an interest‑bearing account), this new limitation may apply there, too.
The common thread is dependence. If a real person in your life relies on that trust income to pay rent, buy groceries, cover care, or simply live with dignity, your plan deserves a second look. Trusts that are required to distribute their income each year—such as common QTIP trusts for surviving spouses, many special needs trusts, and ILITs with taxable income—are at the top of the review list.
And importantly, the provision applies to income in this tax year, which means for some families this is not a “future” issue; it is already happening in the background.
What we know—and what is still unclear
Technically, this double‑tax concern comes from a footnote in the Joint Committee on Taxation’s “Bluebook,” which is Congress’s explanation of what it meant to do with the law. The Bluebook is not the statute itself, but it is often a strong clue to how the IRS will read and enforce the law.
The Treasury Department and IRS can still issue guidance that:
Confirms that family trusts are caught by this limitation,
Clarifies that certain types of trusts are excluded, or
Narrows the impact so that only certain charitable or highly specialized situations are affected.
The professionals we follow are hopeful that guidance will soften or clean up the double‑tax problem, but they are planning as if it might not. As one tax attorney summarized, “We hope for the best, but plan for the worst.”
What is clear is that the law, as currently written and explained, applies to income in this calendar year. Waiting a year or two “to see what happens” is not a neutral move if your trust is already generating income that could be limited.
Our commitment in our Life & Legacy planning is simple: we will continue to track new guidance as it comes out, and when the rules become clearer, we will follow up with every client whose trust may be affected. You will not have to chase us for answers.
What you can do now in Northern Kentucky and Cincinnati
If you have any kind of trust, now is the right time to confirm that it is still doing what you originally built it to do for your family.
A practical review usually starts with three plain‑English questions:
What kind of trust do you have (or do you think you have)?
What income does the trust actually generate each year?
Who depends on the distributions, and what are they using the funds for?
From there, we look at whether the trust is required to distribute its income, or whether the trustee has some flexibility. Some trusts can be restructured, some distribution patterns can be adjusted, and in other cases, we may decide together that a different approach serves your original goals better under the new law.
The families we meet with here in Crestview Hills rarely created a trust just because someone told them to “avoid probate.” They had real people and real reasons in mind:
A child with a disability who needs lifetime support without losing vital benefits.
A spouse who should be able to stay in the home and maintain their lifestyle if something happens.
Adult children or grandkids who need a safety net, not a windfall and a court fight.
This tax law does not change those goals. It simply raises an important question: does the structure you chose years ago still get your family where you wanted to go, given the rules today?
When we sit down with families for a Life & Legacy Planning® Session, we walk through the full picture: what your trust holds, how it was drafted, who it is meant to protect, and how the new rules may affect it. This is not a one‑size‑fits‑all review, because your reasons for planning are as specific as your family.
Most importantly, our relationship does not end when you sign your documents. When laws change—or when life changes—you have a trusted local team you can call to revisit the plan and make sure it still works.
Next step: sit down for a Life & Legacy Planning® Session
If your trust has not been reviewed since the most recent tax law changes, that review is overdue.
We invite you to schedule a complimentary Life & Legacy Planning® Session so we can:
Confirm what type of trust you have and how it is taxed under the current rules.
Identify any risk of hidden double taxation on trust income.
Explore practical options to keep your plan aligned with your family’s needs and values.
Schedule your complimentary Life & Legacy Planning® Session here: Get Started.
This article is a service of Freedom Law Services, a Personal Family Lawyer® firm serving families in Northern Kentucky and the greater Cincinnati area. We do not just draft documents; we make sure you feel informed and empowered about the choices you are making for yourself and the people you love. That is why we offer a Life & Legacy Planning® Session, during which you will get more financially organized than you have likely ever been before and make the best possible decisions for your family. You can begin by calling our office today to schedule your Life & Legacy Planning® Session.
The content above is based on resources from Personal Family Lawyer®, a source believed to provide accurate, up‑to‑date information. It is for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you need advice for your specific situation, you should consult directly with a qualified professional advisor.
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