New Tax Law: An Important Update for Business Trusts
Much of the attention surrounding the recent federal tax law has focused on one headline change: beginning in 2026, the federal estate and gift tax exemption is permanently increased to $15 million per person ($30 million for married couples). For many business owners, that means fewer estate plans will need to be driven primarily by federal estate tax concerns.
But another provision of the law has received far less attention—and for some business owners, it may be just as important.
A Change That Now Applies to Trusts
The new law limits certain itemized deductions for higher-income taxpayers. What many business owners don't realize is that these limitations can also apply to trusts and estates.
Unlike individuals, trusts reach the highest federal income tax bracket at a relatively low level of taxable income—approximately $16,000 in 2026. By comparison, a single individual does not reach that same bracket until taxable income exceeds roughly $640,000.
As a result, some trusts may now lose deductions they previously benefited from or face a higher overall income tax burden than anticipated. Whether that happens depends on the type of trust, how it is taxed, and the income it generates.
Why This Matters for Business Owners
Trusts are often an important part of a business succession plan. They may be used to:
Transfer ownership interests to the next generation
Hold life insurance for buy-sell agreements
Protect business or family assets
Provide liquidity during ownership transitions
Preserve wealth for children and future generations
If a trust is affected by the new rules, the additional tax cost could reduce the amount ultimately available to beneficiaries or influence how and when trust assets should be distributed. Not every trust will be impacted, but many deserve a fresh look in light of the new law.
Which Trusts Should Be Reviewed?
This is not an issue limited to ultra-high-net-worth families. Depending on their structure and income, the following types of trusts may warrant review:
Irrevocable Life Insurance Trusts (ILITs)
Trusts that own business real estate
Trusts funded after the sale of a business
Certain irrevocable or special needs trusts
Other trusts that generate meaningful taxable income
Many of these trusts were established years ago under a different tax landscape. A change in the law does not necessarily mean they should be amended—but it is worth confirming that they continue to accomplish the goals they were designed to achieve.
What Should You Do?
The objectives of your succession plan may not have changed. The tax rules have.
A review of your existing trusts can help determine:
Whether the new deduction limitations apply
Whether the trust's current distribution strategy remains tax-efficient
Whether changes in trust administration should be considered
Whether your overall business succession plan still aligns with your family's goals
In many cases, the answer may simply be that no changes are needed. But identifying that now can provide peace of mind and help avoid surprises later.
If your business succession plan includes one or more trusts, we would be happy to review your plan, explain how these new rules may apply, and discuss whether any updates or coordination with your tax and financial advisors would be beneficial.
Schedule a complimentary 15-minute discovery call today.