The Nine Missing Words
Your trust was the shield. You set it up. You funded it. You paid the lawyer.
The trust earns income. It sends that income to your beneficiary. The beneficiary pays the tax. The trust writes off the handoff. One dollar. One tax. That was the deal.
Congress broke the deal. The cost is $17,611 per million distributed. Nobody at Treasury has said a word.
The Deletion
The old tax code had a thing called the Pease limitation. It shaved your itemized deductions if you earned enough. But Section 68(e) said trusts and estates were exempt. Nine words: this section shall not apply to any estate or trust. Trusts stayed clean.
Congress passed the One Big Beautiful Bill Act. It brought back the deduction haircut as a new Section 68. The formula shaves 2/37 of your deductions. About 5.4%.
But the new Section 68 left out the old exemption for trusts and estates. Gone. No subsection (e). No nine words.
Maybe a mistake. The Joint Committee on Taxation settled that question. Every major tax bill gets a Bluebook. That is the JCT's official, after-the-fact explanation of what Congress meant. In footnote 102 of the May 2026 edition, the JCT confirmed the deletion was on purpose. The haircut applies to trusts. And it applies to the distribution deduction itself.
I mean. The distribution deduction. The one thing that prevents double taxation.
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The Money Walk
Follow the cash. One million dollars of income sits in the trust. The trustee distributes all of it to the beneficiary. The trust claims a million-dollar distribution deduction.
Section 68 shaves 5.4% off that deduction. But only on the portion above the top-bracket threshold. For trusts, the 37% bracket starts at $16,000. So the haircut skips the first $16,000 and hits everything above it.
$1,000,000 minus $16,000 equals $984,000. Multiply by 2/37. You get $53,189 in phantom taxable income. Income the trust no longer holds. Income it already handed to the beneficiary.
The trust owes $17,611 in federal tax on that phantom income.
The beneficiary still reports the full million. Still pays tax on all of it.
Same dollar. Two taxes.
The Scale
A married couple earning $1 million hits the 37% bracket above $768,700. Their version of the same haircut costs about $4,600. Annoying. Survivable.
A trust hits 37% at $16,000. That is not a typo. Sixteen thousand dollars. The haircut bites almost four times harder, dollar for dollar.
The S Corporation Association put it in a way I cannot improve:
Effectively requiring estates/trusts and their beneficiaries to be taxed collectively on 105.4% of their actual distributed income would be entirely inconsistent with "this part."
Sure.
The gold accounting trick Washington hoped you'd never notice.
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Everyone else paid for it.
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The people who moved early in 1934 didn't have a warning.
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The Fallout
The trust already sent the cash out the door. It does not have $17,611 sitting around. So the trustee raids principal to pay the tax bill.
That principal was going to the remainder beneficiaries. The kids. The grandkids. They never touched the income. They never received a distribution. Their inheritance shrinks to cover a tax on money that left the trust before they had any claim to it.
Look, if the trust instrument says "distribute all income to the surviving spouse," the trustee has no choice. The income goes out. The tax bill stays. The kids' share shrinks.
The Silence
The American College of Trust and Estate Counsel told Treasury this was coming on November 10, 2025. Before the law took effect. They spelled it out. Double taxation. Distribution deductions. Fix this.
That was almost twelve months ago. No guidance. No technical correction. No fix. Filing season is walking toward us and nobody has picked up the phone.
The trust was the shield. Congress left nine words on the floor. The shield has a hole in it. The fix is putting those nine words back.
Nobody has.
