New Tax Law Could Affect Business Succession Plans That Use Trusts

When the One Big Beautiful Bill became law, much of the attention focused on one major change: the increase in the federal estate tax exemption.

Beginning in 2026, the exemption rises to $15 million per individual, or $30 million for married couples, with no scheduled sunset. For many business owners, this means fewer estates will be subject to federal estate taxes and greater flexibility when planning for the future. While that is welcome news, it is only part of the story.

The same legislation includes changes that could affect business owners who have trusts as part of their succession or estate planning strategy. Although this provision has received far less attention, it may have important implications for how certain trusts are taxed moving forward.

A New Limitation on Trust Deductions

The new law places additional limits on itemized deductions for taxpayers in the highest federal income tax bracket. What many people don't realize is that these rules also apply to trusts and estates.

Unlike individuals, trusts reach the highest federal income tax bracket at much lower income levels. For 2026, a trust may reach the top tax bracket with approximately $16,000 of taxable income, while an individual generally does not reach that bracket until their income exceeds $640,000. Because of these lower thresholds, trusts that generate relatively modest amounts of income could now be subject to deduction limitations originally designed for high-income taxpayers.

For business owners who rely on trusts as part of their long-term planning, this is an important development that deserves careful review.

Why This Matters for Business Owners

Trusts are commonly used in business succession planning for many reasons. They may hold life insurance policies used to fund buy-sell agreements, own business interests that will eventually transfer to the next generation, protect family assets, or provide financial support for beneficiaries over time.

Depending on how a trust is structured and how much taxable income it generates, the new deduction limitations could increase the trust's tax liability.

Over time, that additional tax may reduce the value of assets available for future generations or require changes to distribution strategies that were established under previous tax rules. The exact impact will depend on the type of trust, its income, and the overall succession plan.

Existing Trusts May Need to Be Reviewed

One common misconception is that only very large estates need to pay attention to these changes.

In reality, many business owners have trusts that could be affected, including:

• Irrevocable life insurance trusts

• Trusts that hold business interests

• Trusts that own business real estate

• Special needs trusts

• Other income-producing trusts established as part of an estate or succession plan

If a trust generates taxable income above the applicable threshold, the new rules may affect how it operates and how efficiently it achieves its intended purpose. Because these provisions apply beginning with 2026 income, existing trusts should be reviewed rather than assumed to continue functioning exactly as they did under prior law.

Reviewing Your Succession Plan

Tax laws change, but succession plans often remain unchanged for years. That is why periodic reviews are so important. A plan that made perfect sense when it was created may no longer produce the same results under today's legal and tax environment.

A comprehensive review can help determine:

• Whether existing trusts are affected by the new rules.

• If distribution strategies should be updated.

• Whether trust structures still align with your business and family goals.

• If additional planning opportunities are available under the current law.

The objective is not simply to reduce taxes. It is to ensure your succession plan continues to protect your business, your family, and the legacy you intend to leave behind.

Don't Assume Your Current Plan Still Works

Many business owners created trusts years ago under a very different tax landscape. While the recent increase in the estate tax exemption may simplify planning for some families, the new trust deduction limitations create additional considerations that should not be overlooked.

If your business succession plan includes one or more trusts, now is an excellent time to review those documents with your legal, tax, and financial advisors. Small adjustments made today may help preserve more of your business and estate for the people you intend to benefit tomorrow.

As tax laws continue to evolve, keeping your succession plan current is one of the most effective ways to protect both your business and your family's future.

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