Could the New Tax Law Affect Your Family Trust? What Hawaiʻi Families Should Know
- Jul 1
- 5 min read
If you've been following recent tax law changes, you've probably heard about the increase in the federal estate tax exemption. For many families, that's welcome news.
But there is another provision receiving far less attention — one that could have a much broader impact on families with existing trusts.
Several clients have already asked whether the recently enacted federal tax legislation (commonly referred to as the "One Big Beautiful Bill") changes anything about their estate plans. The honest answer is: it may.
While government agencies are still expected to provide additional guidance, tax professionals across the country are paying close attention to a provision that could cause certain trusts to pay tax on income that beneficiaries are already paying tax on — a result many are describing as potential "double taxation."
The Good News: Higher Estate Tax Exemptions
Beginning in 2026, the federal estate tax exemption increased to approximately $15 million per person (or $30 million for married couples) with no currently scheduled sunset.
For the relatively small percentage of families whose estates approach those thresholds, this is a significant planning opportunity.
However, another provision tucked into the legislation may affect a much wider group — including many families who created trusts simply to protect loved ones rather than reduce estate taxes.
Why Tax Professionals Are Concerned
The new law limits the benefit of certain deductions for taxpayers in the highest federal income tax bracket.
According to tax professionals reviewing the legislation and the accompanying Congressional explanation, that limitation may also apply to trusts and estates.
Why is that important?
Unlike individuals, trusts reach the highest federal income tax bracket at relatively low income levels. Beginning in 2026, a trust reaches the top 37% bracket after roughly $16,000 of taxable income, while an individual generally doesn't reach that same bracket until earning more than $640,000.
That means even relatively modest trusts could potentially become subject to rules originally intended for very high-income taxpayers.
The Potential Double Taxation Issue
Historically, many trusts that distribute income to beneficiaries receive a deduction for those distributions, while the beneficiary reports and pays tax on the income received.
The concern is that under the new law, the trust may no longer receive a full deduction.
If that interpretation ultimately proves correct, both the trust and the beneficiary could pay tax on a portion of the same income.
For trusts that are required to distribute income each year, that could reduce funds available to beneficiaries or require trustees to make difficult decisions about how distributions are handled.
Although additional guidance from the U.S. Treasury is expected, many tax advisors believe this issue deserves attention now rather than later.
Which Trusts Could Be Affected?
This isn't just an issue for ultra-wealthy families.
Depending on future guidance, trusts that may be impacted include:
Trusts established for a surviving spouse (such as certain marital or QTIP trusts)
Special needs trusts designed to protect government benefit eligibility
Certain irrevocable life insurance trusts that generate taxable income
Other trusts that are required to distribute income to beneficiaries
The common characteristic is that these trusts exist to provide ongoing financial support for someone who depends on them.
What We Still Don't Know
An important point is that much of the current concern comes from Congress's explanatory materials rather than the statutory language itself.
The U.S. Treasury Department is expected to issue additional guidance that may:
Clarify which trusts are actually affected.
Explain how the deduction limitation should be applied.
Reduce — or potentially eliminate — the concern for many trusts.
In other words, there are still unanswered questions.
However, because the provision applies beginning with the 2026 tax year, many advisors recommend reviewing affected trusts now rather than waiting until year-end.
What Hawaiʻi Families Should Do
If you have a trust, now is a good time to make sure it still accomplishes the goals you intended.
That review may include questions such as:
What type of trust do you have?
Does the trust generate taxable income?
Is the trustee required to distribute income each year?
Would adjustments to the trust or distribution strategy better accomplish your family's goals under the new rules?
Every family's situation is different, which is why there is no universal answer.
For many families in Honolulu and throughout Hawaiʻi, a trust was created to protect a surviving spouse, care for a loved one with a disability, preserve family assets, or provide long-term financial security. Those goals remain just as important today — even if the tax rules surrounding trusts continue to evolve.
Estate Planning Doesn't End After You Sign
One of the biggest misconceptions about estate planning is that once your documents are signed, the work is finished.
In reality, good estate planning is an ongoing process.
Laws change. Tax rules change. Families change.
A trust that worked perfectly a few years ago may deserve another look today — not because it was drafted incorrectly, but because the legal landscape has changed.
As an estate planning attorney serving Honolulu and families throughout Hawaiʻi, I closely monitor developments that could affect my clients' plans. As additional guidance becomes available, I'll continue reviewing how these changes may impact the families I serve.
The Bottom Line
The new federal tax law may create unexpected tax consequences for certain trusts, but many important questions remain unanswered.
If your trust distributes income to beneficiaries — or if it has been several years since your estate plan was reviewed — this is an excellent time to revisit your planning. A proactive review today can help ensure your trust continues to protect the people you created it to protect, regardless of how the rules ultimately develop.
Frequently Asked Questions
Does every trust need to be updated because of the new tax law?
No. Many trusts may not be affected at all. Whether changes are appropriate depends on the type of trust, the assets it owns, how income is distributed, and future Treasury guidance.
Should I be worried if I have a revocable living trust?
Not necessarily. Most revocable living trusts do not pay income tax while the person who created the trust is living. However, every situation is unique, and it's worth having your plan reviewed if you have questions.
I already have a trust. Why should I review it?
Estate planning is not a "set it and forget it" process. Changes in tax laws, family circumstances, and financial goals can all affect whether your existing plan continues to work as intended.
I live in Hawaiʻi. Does this federal law still apply to me?
Yes. Federal income tax rules apply regardless of where you live, including throughout Hawaiʻi.
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This article is brought to you by the Law Office of Keoni Souza, a boutique estate planning firm located in Honolulu, Hawaiʻi, proudly serving families on Oʻahu and across the Hawaiian Islands. At our firm, estate planning is about more than documents — it’s about creating lasting peace of mind for you and the people you love. Through our unique Life & Legacy Planning Process, we guide you to make informed, empowered decisions that protect your wealth, your wishes, and your family’s future. To get started, contact our Honolulu office today to schedule your Life & Legacy Planning Session.
Disclaimer: The information on this website is for informational purposes only and should not be considered legal advice. For guidance tailored to your specific situation, please consult an estate planning attorney licensed in the State of Hawaiʻi. Use of this website or communication through this site does not create an attorney-client relationship with the Law Office of Keoni Souza, LLC.
