Non-grantor trusts are separate taxpayers that file Form 1041 annually Trust income not distributed to beneficiaries is taxed at the trust level Trusts reach the top 37% federal bracket at roughly $15K of taxable income By contrast, individuals do not hit 37% until roughly $626K of taxable income (2025)

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Tax Planning

Trust Taxation

Trusts are taxed as separate entities with compressed brackets that reach the top rate quickly. Learn about grantor vs non-grantor trusts, DNI, K-1 reporting, and strategies to manage trust-level taxes.

Trust Taxation

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How Trusts Are Taxed

Non-grantor trusts are separate taxpayers that file Form 1041 annually
Trust income not distributed to beneficiaries is taxed at the trust level
Trusts reach the top 37% federal bracket at roughly $15K of taxable income
By contrast, individuals do not hit 37% until roughly $626K of taxable income (2025)

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How Trusts Are Taxed

Non-grantor trusts are separate taxpayers that file Form 1041 annually
Trust income not distributed to beneficiaries is taxed at the trust level
Trusts reach the top 37% federal bracket at roughly $15K of taxable income
By contrast, individuals do not hit 37% until roughly $626K of taxable income (2025)

Grantor vs Non-Grantor Trusts

Grantor trusts are ignored for income tax, all income reports on the grantor's return
Non-grantor trusts pay their own income tax or pass it through to beneficiaries
Revocable living trusts are grantor trusts during the grantor's lifetime
Intentionally defective grantor trusts are used in advanced estate planning

Distributable Net Income (DNI)

DNI is the maximum amount of trust income taxable to beneficiaries upon distribution
It includes interest, dividends, rents, and business income but generally not capital gains
DNI acts as a ceiling, distributions above DNI are treated as tax-free principal
The trust receives a deduction for income distributed up to the DNI amount

Income Distribution Deduction

Trusts deduct income distributed to beneficiaries, reducing trust-level tax
Beneficiaries report the distributed income on their own personal returns
This shifts income from the trust's compressed brackets to the beneficiary's lower rates
Timing distributions before year-end can optimize the tax outcome for both parties

Capital Gains and K-1 Reporting

Capital gains are generally taxed at the trust level and not included in DNI
Long-term capital gains in trusts face the same 20% top rate plus 3.8% NIIT
Schedule K-1 reports each beneficiary's share of trust income, deductions, and credits
Character of income, ordinary, capital gain, tax-exempt, flows through to beneficiaries

State Income Tax and Nexus

States determine trust taxation based on grantor residence, trustee, or beneficiary domicile
Some states tax trusts created by residents even if the trust later moves out of state
Choosing trustee location and trust situs can affect the state tax burden significantly
Multi-state trusts may need to file returns in more than one jurisdiction

Strategies to Manage Trust-Level Tax

Distributing income to beneficiaries in lower brackets reduces overall tax paid
Using grantor trust status keeps income on the grantor's return at individual rates
Tax-efficient investments, municipal bonds, index funds, can reduce taxable income
Coordinate distribution timing with beneficiaries' income levels each year

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The information above is for educational purposes only and does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. Any historical figures are for illustration only, and past performance does not guarantee future results. Tax laws, regulations, and contribution limits change frequently, the details here may become outdated. Individual circumstances vary. Consult a qualified financial advisor, CPA, or attorney for guidance specific to your situation. Rubric Advisors is registered with the California DFPI; registration does not imply a certain level of skill or training.

Trust Taxation

How Trusts Are Taxed

Grantor vs Non-Grantor Trusts

Distributable Net Income (DNI)

Income Distribution Deduction

Capital Gains and K-1 Reporting

State Income Tax and Nexus

Strategies to Manage Trust-Level Tax

How Trusts Are Taxed

Grantor vs Non-Grantor Trusts

Distributable Net Income (DNI)

Income Distribution Deduction

Capital Gains and K-1 Reporting

State Income Tax and Nexus

Strategies to Manage Trust-Level Tax

Related Topics

Trust Tax Rate Strategy

Tax Strategies for S-Corp Owners

Business Succession Planning: Preparing for What's Next

Trust Taxation

How Trusts Are Taxed

Grantor vs Non-Grantor Trusts

Distributable Net Income (DNI)

Income Distribution Deduction

Capital Gains and K-1 Reporting

State Income Tax and Nexus

Strategies to Manage Trust-Level Tax

How Trusts Are Taxed

Grantor vs Non-Grantor Trusts

Distributable Net Income (DNI)

Income Distribution Deduction

Capital Gains and K-1 Reporting

State Income Tax and Nexus

Strategies to Manage Trust-Level Tax

Related Topics

Trust Tax Rate Strategy

Tax Strategies for S-Corp Owners

Business Succession Planning: Preparing for What's Next