One Sentence Kept Trusts Tax-Free. Congress Deleted It.

The tax code used to have a line. IRC Section 68(e). It said:

"This section shall not apply to any estate or trust."

Ten words. They kept a pipe sealed for decades. Congress pulled that line out of the code when it passed the One Big Beautiful Bill Act. The pipe broke. Most trustees don't know their basement is wet.

Section 68 is the part of the code that shaves your itemized deductions once your income gets high enough. Think of it like a haircut on your write-offs. The old version, called the Pease limitation, had this one sentence that said: trusts and estates, you're exempt. Don't worry about it.

A non-grantor trust is a trust that files its own tax return. Separate from you. Your family trust. Your late spouse's trust. The trust holding your rental property. It earns income. It takes deductions. It pays its own tax bill. Or it distributes the income to beneficiaries and they pay instead.

That exemption kept the math clean.

Congress didn't just let the exemption lapse. The Senate Finance Committee summary says the new rule is "applicable to individuals, estates, and trusts." Not an accident. Not a typo. They named trusts on purpose.

The new Section 68 shaves 2/37ths off your itemized deductions for every dollar above the top tax bracket threshold. For a married couple filing jointly, that threshold sits around $768,700 in 2026. You'd need to be doing pretty well before the haircut touches you.

For a trust? The 37% bracket kicks in at roughly $16,000.

I mean. Sixteen thousand dollars. That's a rounding error in a portfolio trust. That's one quarter of rental income from a duplex.

Look. Let me run the cash for you.

A trust earns $116,000 in 2026. Ordinary income. The trustee distributes every penny to the beneficiary. All of it. The trust keeps nothing.

Under the old rules, the trust gets a full deduction for the distribution. $116,000 in, $116,000 out. Tax at the trust level: zero. The beneficiary picks it up on their return. Clean.

Under the new rules, the trust's income above $16,000 is $100,000. The haircut is 2/37ths of that. Run it. That's $5,405.41. The trust's allowable deduction drops from $116,000 to $110,594.59.

The trust distributed every dollar. But the code says it can only write off $110,594.59. So $5,405.41 sits there as phantom taxable income. At 37%, that's about $2,000 in tax.

On cash the trust already gave away.

The trust owes $2,000. The trust has zero dollars. Sure.

It gets worse. The formula eats itself.

To figure the trust's deduction, you need to know its Distributable Net Income. To know DNI, you need to know the deduction. But the deduction changes the DNI. Which changes the deduction.

You need the answer to start the equation. The equation changes the answer. The New York State Bar Association flagged this. The math is not just unfair. It's circular.

The Joint Committee on Taxation confirmed this reading. Footnote 102 of a 341-page document published May 28, 2026. The JCT says yes, the distribution deduction is an itemized deduction. Yes, it gets the haircut.

But the JCT Bluebook is not law. It doesn't override the tax code. It doesn't override regulations. It doesn't override court rulings. It's a Congressional committee's opinion of what the law means.

And the IRS? Not a word. No guidance. No ruling. No notice. Nobody's in charge of the answer yet.

One sentence used to keep this pipe sealed. Somebody pulled it. The basement's flooding. And nobody's sent a repair crew.