The 60th Annual Heckerling Institute on Estate Planning, the largest yearly gathering of estate lawyers, accountants and trust officers, ran January 12 to 16, 2026, in Orlando, and a Forbes review published January 16 cast it as the start of a new era of wealth transfer. It was the first Heckerling since the One, Big, Beautiful Bill Act set a permanently higher estate and gift tax exemption, $15 million per person for 2026. For affluent families, the most consequential message was less about that number than about an obscure provision that may raise income taxes on trusts.
What changed
For years the Institute's agenda was shaped by a scheduled cut in the exemption. With the IRS setting the 2026 basic exclusion at $15 million, indexed for inflation from 2027 and no longer set to fall, the pressure to make large gifts before a deadline is gone. A married couple can shelter about $30 million combined, provided the surviving spouse keeps the unused amount through a portability election. For most families below that level, the practical questions now center on income tax, trust design and state law rather than on the federal estate tax.
The 2/37 problem for trusts
The sharpest warning came from the annual Recent Developments panel of Samuel Donaldson, Carlyn McCaffrey and Turney Berry, according to attendee accounts collected by WealthManagement.com. OBBBA reduces itemized deductions for taxpayers in the 37 percent bracket by 2/37 of the smaller of those deductions or the taxable income above where that bracket begins. Congress expressly exempted certain deductions from the haircut but did not list the income distribution deduction, which non-grantor trusts use to avoid paying tax on income they pass to beneficiaries.
If that reading holds, a trust could lose part of its deduction even though the beneficiary still reports the full distribution, so some income would be taxed twice. The panel acknowledged Congress probably did not intend that result, but said practitioners may be stuck with it until a technical correction arrives. One attendee wrote that many in the room, including experienced practitioners, were floored.
Who is affected
The exposure is concentrated in non-grantor trusts with enough income to reach the top bracket, which trusts hit at far lower income than individuals. That can include family trusts, dynasty trusts and marital trusts that hold investment portfolios. Grantor trusts, whose income is taxed to the person who created them, are not the focus of the concern.
The after-tax math
Example, using round numbers and a simplified calculation: a non-grantor trust with $500,000 of income, all in the top bracket, distributes $400,000 to a beneficiary who is also in the 37 percent bracket. Under the panel's reading, the $400,000 deduction is cut by 2/37, or about $21,600. At 37 percent, the trust would owe roughly $8,000 of tax on income the beneficiary is also taxed on in full. Actual results depend on the trust's other deductions and on how the IRS and tax software ultimately apply the rule.
Workarounds discussed and what to watch
McCaffrey outlined possible fixes. One is giving a beneficiary an annual power to withdraw trust income, so that income is taxed directly to the beneficiary and never reaches the trust's return. Examples included a surviving spouse's power to withdraw a marital trust's accounting income at least annually, and a trustee's power to designate part of a discretionary trust's income each year for withdrawal. Another is holding assets through S corporations to avoid tax at the trust level. Berry raised practical concerns about withdrawal powers, and panelists cautioned that limiting a power by an ascertainable standard would likely defeat the intended tax treatment.
Other sessions covered qualified small business stock planning under OBBBA, disputes over where a trust is legally sited, and planning for clients with foreign assets. Trustees and families with large non-grantor trusts may find it worth reviewing distribution patterns with an estate attorney or CPA while waiting for Treasury, the IRS or Congress to clarify the 2/37 rule.
Sources
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