Trump’s ‘big beautiful bill’ has ‘double taxation’ trap, lawyers say

A version of this article originally appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to high-net-worth investors and consumers. become a member to receive future editions straight to your inbox.

A “big beautiful bill” provided many tax benefits for top earners, although it limited the amount they could deduct. But lawyers for the wealthy said they discovered a surprise that could amount to double taxation in the footnotes of a tax code guide released last week by Congress’s policy staff.

Unexpectedly, deduction limits were placed on trusts and estates, lawyers said. According to the lawyers’ interpretation of the document, even if the foundation gives all of its income to its beneficiaries, it will have to pay taxes on some of this income.

Trusts with income as little as $16,000 would also be subject to additional taxes, although the consequences would be more severe for trusts and estates of the ultra-wealthy, lawyers said.

“There is potentially an element of double taxation,” said Dan Griffith, director of wealth strategy at Huntington Bank. “This is something that would impact someone with a $400,000 special needs trust. This won’t just be something that $100 million dynasty trusts will suffer from.”

Griffith said he was particularly concerned about trusts that had to distribute all of their income. Trusts would either have to sell assets to pay taxes, sacrifice future investment returns or reduce distributions to beneficiaries, he said.

The provision creates a “mathematical nightmare” for tax attorneys and financial advisors, according to Justin Miller, director of national wealth planning at Evercore Wealth Management. Miller gave the example of a wealthy couple who wanted to leave their property to charity.

“If I have to pay income tax, that means I’m giving less money to charity because I’m giving money to the IRS. That means I have to adjust my deduction even more now because less money is going to charity,” he said. “Did Congress really intend to create an algebraic formula?”

In the past, trusts and estates could deduct income given to beneficiaries, which was then taxed at the individual level. This distribution deduction is designed to ensure that income is taxed only once.

However, the new deduction limitation for top-earning individuals now also applies to trusts and estates, according to a footnote in the Joint Committee on Taxation’s recent tax explainer. bluebook. JCT is non-partisan and serves to explain legislation.

A Big Beautiful Bill The Act’s cap on itemized deductions means top-tier taxpayers would get a deduction benefit of only 35 cents for every dollar, rather than 37 cents. This applies to charitable deductions, and experts say it’s already affecting how top earners donate.

Although the Bluebook is an interpretation of the OBBBA rather than the law, according to attorney Robert Keebler, the provision raises concerns in the financial advisory community. For example, he establishes foundations that will provide income to the surviving spouses of his clients’ second marriages and leave the remainder to the children from their first marriage.

Imagine a foundation 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 taxable even if the widow were taxed on the entire $370,000, according to Keebler. To pay the tax, the trust must either dip into its own corpus, thus reducing the children’s future benefits, or get permission to give less to the spouse, which may require going to court.

According to Keebler, this provision is valid for this tax year.

The double taxation problem could be resolved by an amendment by Congress or, more likely, by guidance from the Treasury Department. Keebler is planning with the expectation that this will continue.

“We’re hoping for the best, but we’re also planning for the worst,” he said.

The Treasury Department did not respond to 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, he said that the devil would be in the details regarding the cuts that the ministry would decide to limit.

For example, the department could allow foundations to take unlimited deductions from income distributions to beneficiaries such as family members, which would address the biggest concern for financial advisors, Miller said. This outage is mentioned in the footnote of the Bluebook.

But Miller noted that the Bluebook footnote makes no mention of charitable deductions for foundations and estates. He told CNBC that he thought the omission was intentional and that it was possible for the Treasury to maintain the deduction limit on charitable donations to foundations and estates.

A person familiar with JCT procedures told CNBC that staff commented that the OBBBA charitable deduction would be treated differently than other deductions. The person spoke on condition of anonymity because he was not authorized to speak publicly about the matter.

With six months to go 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 right thing. We don’t know what that is right now.”