One Big Beautiful Bill Act Income Tax Opportunities: SALT Deduction and Non-Grantor Trusts

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The recently enacted OBBBA introduces several compelling new planning opportunities for high-net-worth individuals and families to consider. Among the most impactful changes is the increase to the state and local tax deduction (SALT) cap. These provisions open new avenues for income tax planning, which can yield more immediate and widespread benefits than traditional estate tax planning strategies.

Estate tax changes under OBBBA

As discussed in an initial piece on the OBBBA, the estate and gift tax exemption was permanently increased to $15 million per person beginning in 2026, avoiding a scheduled reduction to approximately $7 million per person in 2026. In practical terms, this now increased permanent exemption reduces the urgency of certain estate tax planning strategies for many families. However, the OBBBA simultaneously enhances opportunities in income tax planning, which affects a broader segment of taxpayers and can result in the more immediate realization of tax savings.

Expanded SALT deduction cap

One of the most notable changes is the increase in the SALT cap from $10,000 to $40,000 per taxpayer (including a married couple), with a modified adjusted gross income MAGI phaseout from $500,000 to $600,000 (but never below $10,000). This change revises interest in non-grantor trust strategies, which allow families to "stack" multiple SALT deductions by creating separate taxpayers through trust structures.

Non-Grantor trusts: A renewed strategy

Historically, grantor trusts have been favored in estate tax and wealth transfer planning. A grantor trust is not a separate taxpayer from the grantor (i.e., income and deductions are reported on the grantor’s income tax return), and the grantor pays any income tax liability attributable to the grantor trust. This is a feature of the grantor trust, not a bug, and effectively allows for the trust and its assets to grow "tax-free" while simultaneously reducing the grantor’s taxable estate. Conversely, a non-grantor trust is its own taxpayer, files its own tax return and is responsible for the payment of its own tax liability. While non-grantor trust planning has had its uses in the past (e.g., Qualified Small Business Stocks), the $10,000 SALT cap made certain planning opportunities impractical due to the costs associated with establishing and administering these trusts.

A practical example: leveraging multiple trusts

To put this strategy into context, consider a scenario involving a married couple interested in making lifetime gifts to their children. A non-grantor trust strategy could provide meaningful advantages based on their specific situation. For example, a married couple with three children could create three separate non-grantor trusts, one for each child. Each non-grantor trust would be its own separate taxpayer, and would have its own $40,000 SALT cap. By structuring the gifting program in this way, it may be possible for the family to take advantage of an additional $120,000 in SALT deductions (3 x $40,000), assuming the trusts meet the MAGI threshold and generate sufficient SALT expenses.

Additionally, shifting income to these trusts could help the couple themselves move to a lower tax bracket and/or get under the MAGI threshold, increasing their personal SALT deduction cap. This strategy requires careful, holistic planning, and must be weighed against the benefits of a grantor trust-based gifting program. Factors such as the nature of the assets, cash flow needs, applicable state law and location of the grantor and beneficiaries must be considered.

Key considerations and risks

While the potential tax benefits are compelling, there are important considerations to keep in mind. Since the increased SALT cap is set to expire in 2030, trust documents should be drafted with sufficient flexibility to adapt to this planned expiration or future legislative changes. Note that the IRS has traditionally scrutinized aggressive trust "stacking" due to its potential for abuse, and it is imperative to consult with appropriate legal and tax advisors before implementing such a program.

Takeaways for high-net-worth families

The OBBBA marks a significant shift in the landscape of tax and estate planning. While the increased estate tax exemption reduces pressure on wealth transfer strategies, the expanded SALT deduction presents timely opportunities for income tax optimization. Non-grantor trust structures, once sidelined due to cost and complexity, now warrant renewed attention.

Impacted individuals and families should work closely with their advisory team to evaluate whether these strategies align with their long-term goals and ensure that any planning incorporates flexibility to respond to future changes in tax law.

For more information about high-net-worth tax strategies and the One Big Beautiful Bill Act, contact your Fifth Third Private Bank advisor.