Looming Charitable Deduction Limits Require Swift Tax Planning

Consider this scenario: A trust directs its entire residue to charity, and each year the trustee distributes an amount equal to the taxable income to the beneficiary to reduce the taxable income to zero under the unlimited charitable deduction for trusts and estates.

Beginning in 2026, that strategy may no longer work. Instead of fulfilling the grantor’s charitable intent, the trustee will be sending dollars to the IRS.

The tax law enacted on July 4 revamps the Internal Revenue Code, imposing new limits to overall itemized deductions that indirectly affect the “unlimited” charitable deduction for trusts and estates.

This will require fiduciaries to reassess planned charitable distributions to mitigate tax exposure and prepare for additional taxable income and related tax liability.

Certain trusts and estates have long relied on charitable contributions to offset taxable income. The new limitation creates real tax consequences, and some trusts and estates may generate taxable income for the first time, requiring annual planning to address the tax liability.

However, fiduciaries that adapt to the new framework can minimize tax exposure and preserve the value of charitable giving within the constraints of the new deduction limits. Planning opportunities include leveraging cumulative gross income to maximize deductions, preparing for tax exposure where income remains, and accelerating income and charitable gifts before the end of 2025 to take advantage of current rules.

Details of Changes

Under Section 641(b), trusts and estates are taxed in the same manner as individuals, except as otherwise provided by statute. The revised Section 68 removes the prior exception for trusts and estates, subjecting them to an overall itemized deduction limit starting in 2026.

The limitation reduces allowable itemized deductions by about 5.4% of the lesser of total itemized deductions, or the amount by which taxable income (increased by itemized deductions) exceeds the 37% tax bracket.

Most trusts and estates have taxable income that exceeds the 37% tax bracket, which starts at $16,001 in 2026. This change affects the previously “unlimited” charitable deduction under Section 642(c).

After the initial passage of the tax law, it was unclear whether the removal of the trust and estate exception was intentional. However, the Senate Finance Committee section-by-section analysis was updated after passage to explain that the limitation would apply to trusts and estates, making it clear it was intentional.

Thus, beginning in 2026, trusts and estates may no longer receive a full deduction for charitable contributions, requiring strategic reassessment of planned charitable distributions to mitigate tax exposure.

Trust and estate charitable deductions are generally not subject to the 0.5% floor because that floor applies when Section 170 applies, generally not to charitable deductions under Section 642(c).

Fiduciaries must now evaluate whether to increase charitable giving to reduce exposure, or reserve liquidity for the resulting tax burden. These changes make proactive planning essential.

Fiduciary Planning Strategies

Fiduciaries should consider the following three planning approaches to adapt to the upcoming changes:

Accelerating income and charitable distributions. With the deduction limitation taking effect in 2026, fiduciaries should act before year end to take advantage of the current rules.

Accelerating income and charitable distributions into 2025 may allow trusts and estates to take full advantage of the existing unlimited deduction under Section 642(c), unless the trust has unrelated business income. This window offers an opportunity to offset income without the constraints of Section 68.

Fiduciaries should evaluate whether shifting income recognition or front-loading charitable distributions aligns with the trust or estate’s objectives and whether it could provide meaningful tax savings before the new rules apply.

Leveraging cumulative gross income to increase deductions. Strategically capitalizing on cumulative gross income can help maximize charitable deductions and offset the new limitation.

Under Section 642(c)(1), trusts and estates may deduct charitable contributions only to the extent they are paid from gross income. Because gross income generally exceeds taxable income, a trust or estate can contribute amounts greater than taxable income to optimize deductions.

Trusts and estates with higher cumulative gross income may be able to make larger charitable gifts to offset the limitation.

For example, in 2025, a trust with taxable income and gross income of $1 million can distribute $1 million to the charitable beneficiary and eliminate tax. In 2026, the same deduction would be reduced by about $50,000 under Section 68. If gross income exceeds $1,050,000, the trustee could make a distribution to the charitable beneficiary of $1,050,000 to fully offset the 2026 taxable income.

Taking steps toward liquidity planning for tax liability. Even with strategic gross income management, many trusts and estates will still face residual taxable income because of the Section 68 deduction limitation. In these cases, liquidity planning to cover tax liability becomes essential.

Fiduciaries should ensure the trust or estate has sufficient liquid assets to pay any resulting taxes without disrupting long-term objectives. This may involve adjusting investment strategies, reevaluating distributions, or setting aside reserves specifically for anticipated tax obligations.

Proactive liquidity planning helps to avoid forced asset sales and ensures the trust or estate can meet both its charitable and financial goals.

Charitable Planning Roadmap

These planning strategies can help mitigate Section 68’s impact, illustrating that fiduciaries must take a broader approach to charitable planning under the new framework.

Start by reviewing trust and estate instruments to confirm charitable intent and any requirements for charitable giving.

Next, model projected income and deduction limits under Section 68 to estimate potential tax exposure and identify gaps where charitable contributions may no longer fully offset taxable income. To address these gaps, develop liquidity strategies to fulfill any anticipated tax liability.

Fiduciaries also should communicate potential changes in strategy and the reasoning for these changes to beneficiaries and advisers to maintain transparency.

Ultimately, fiduciaries should act now to preserve charitable goals and minimize tax exposure under the new framework.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Carol Warley is RSM US’ Washington National Tax private client services tax practice leader in Houston.

Amber Waldman is a senior director at RSM US Washington National Tax in Melbourne, Fla.

Rachel Ruffalo is a supervisor with RSM’s Washington National Tax practice in Miami.

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