By Harry Prabandham · Updated September 28, 2026
Tax Planning
How Trusts Are Taxed: Grantor vs. Non-Grantor, DNI, and K-1s
Grantor trust income is taxed to the grantor. A non-grantor trust pays its own tax on retained income, and beneficiaries pay tax on what is distributed.
How Trusts Are Taxed: Grantor vs. Non-Grantor, DNI, and K-1s
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How are trusts taxed?
- It depends on whether the trust is a grantor trust or a non-grantor trust for income tax purposes.
- Grantor trust income is reported by the grantor at individual rates, as if the trust did not exist for income tax.
- A non-grantor trust is a separate taxpayer that files Form 1041 and pays tax on income it keeps.
- Income a non-grantor trust distributes is generally taxed to the beneficiaries instead, up to the trust's distributable net income.
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Full Guide
How are trusts taxed?
- It depends on whether the trust is a grantor trust or a non-grantor trust for income tax purposes.
- Grantor trust income is reported by the grantor at individual rates, as if the trust did not exist for income tax.
- A non-grantor trust is a separate taxpayer that files Form 1041 and pays tax on income it keeps.
- Income a non-grantor trust distributes is generally taxed to the beneficiaries instead, up to the trust's distributable net income.
What makes a trust a grantor trust?
- Sections 671 to 679 treat the grantor as owner when the grantor keeps certain powers or interests, such as the power to revoke.
- Revocable living trusts are grantor trusts while the grantor is alive and become non-grantor trusts after death.
- Some irrevocable trusts are intentionally drafted as grantor trusts so the grantor pays the income tax while assets sit outside the estate.
- Whether a trust is grantor or non-grantor is a drafting question for the estate attorney.
What is distributable net income (DNI)?
- DNI caps both the trust's deduction for distributions and the amount beneficiaries must include in income.
- It generally includes interest, dividends, rents, and business income, and generally excludes capital gains.
- Distributions above DNI are generally received by beneficiaries without further income tax, as principal.
- The character of income, such as qualified dividends or tax-exempt interest, generally carries through to beneficiaries.
What rates apply to income a trust keeps?
- In 2026, trust brackets are 10% to $3,300, 24% to $11,700, 35% to $16,000, and 37% above that.
- Long-term gains and qualified dividends are taxed at 0% to $3,300, 15% to $16,250, and 20% above that.
- The 3.8% net investment income tax applies to undistributed investment income once AGI exceeds $16,000.
- For comparison, a single individual reaches 37% only above $640,600 in 2026.
What does a beneficiary receive at tax time?
- Each beneficiary who received a taxable distribution gets a Schedule K-1 from the trust's Form 1041.
- The K-1 shows the beneficiary's share of income by type, deductions, and credits to report on their own return.
- Calendar-year trust returns and K-1s are generally due April 15, though extensions often delay K-1s.
- Beneficiaries with trust income may need to adjust estimated payments or withholding.
How do states tax trusts?
- States tax trusts based on different ties, such as the grantor's residence when the trust was created, trustee residence, administration, or beneficiaries.
- Some states tax trusts created by residents even after the trust and trustees have moved elsewhere.
- California taxes trust income based on resident fiduciaries and resident non-contingent beneficiaries.
- A trust with ties to several states may need to file in more than one of them.
Key takeaways
- Grantor trust income is taxed to the grantor; non-grantor trusts pay tax on what they retain.
- DNI governs how much distributed income moves to beneficiaries, and capital gains usually stay in the trust.
- Compressed brackets reach 37% above $16,000 of retained income in 2026.
- Trust design, distributions, and state exposure call for an estate attorney and CPA.
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