How Trusts Are Taxed: A Guide for 2024 and 2025

What is a trust?

A trust is a legal agreement on how to manage and distribute someone's financial assets. It's similar to a will but may allow families to skip the lengthy probate process, protect their assets, and reap several tax benefits, which we will cover further down. 

A trust involves three main parties:

• Grantor: The person who owns the assets and creates the trust.
• Beneficiaries: The person, people, or entity that receives the assets in the trust.
• Trustee: The person or entity who manages the trust.

For example, a grantor can put their home and any other assets into a trust and assign a trustee to make sure their beneficiaries receive the assets at the appropriate time. 

There are several types of trusts as outlined by the IRS, and each is taxed differently:

• Simple trust. A simple trust requires that all income is distributed annually. It cannot accumulate income, distribute from principal or make charitable contributions. A simple trust facilitates a simple transfer of assets from grantor to beneficiary.
• Complex trust. A complex trust is the opposite of a simple trust. It can accumulate income, make charitable contributions, and distribute from the principal. Because it can accumulate income, it has to pay income tax, but in return, it offers deductions and other tax benefits.
• Grantor trust. A grantor trust is any trust in which the grantor is considered the owner of the assets. It lets the grantor retain control of the trust’s assets, but also makes them responsible for any relevant taxes. 

Whichever trust you choose, if it's constructed well, it can provide some tax benefits.

How are trusts taxed?

Unlike ordinary income tax, trusts are taxed based on the type of trust and how the income is distributed.

There are several factors to consider when deciding what kind of trust to set up:

• Will your trust generate income?
• Would you like to maintain control over your trust or assign it to a trustee?
• Would you like the ability to make changes to your trust?
• When would you like your beneficiaries to receive distributions?
• Will your trust include real estate?

Because money, assets, and taxes are involved, it's wise to choose a knowledgeable attorney who can help you choose and correctly set up a trust that will meet your needs. At the very least, you should have an attorney review your trust documents—even if you’re confident in your ability to set up your trust appropriately.

Do trusts pay capital gains taxes?

Capital gains refer to the increased value of an asset over time. For example, if you purchased a house for $100,000 and sold it for $400,000 decades later, you will pay capital gains taxes on the $300,000 increase. Short-term gains (a year or less) are taxed at your ordinary income tax rate. Long-term gains (over a year) are taxed at a lower rate.

But what if the asset is in a trust? Is it still subject to capital gains? That depends on the type of trust you have and which assets are in it:

• Simple trusts are required to pay taxes on any capital gains.
• Complex trusts, when set up correctly, can avoid capital gains taxes, probate, and inheritance taxes, but they are not an affordable option for most.
• Irrevocable trusts are responsible for paying capital gains tax.

An experienced estate planning attorney can help you navigate all the minutia of each type of trust and help you choose the best trust for your situation.

Are trust distributions taxable?

Whenever an asset is passed from a trust to a beneficiary, it is called a distribution. Whether or not the distribution is taxable depends on the type of trust (revocable or irrevocable) and the type of distribution. If it comes from the principal amount, it is typically not taxed. If it comes from any income generated through the trust, it is taxed as income.

For example, let's say you have $1,000 in your trust. If you take out $500, you wouldn't be taxed on that because it's pulling from the principal amount. If, however, you have $1,000 in the trust, and then you earn $500 in taxable income, and then you take out $500, that would likely be taxable.

There are some exceptions and special circumstances that would require different tax rules and rates, so it's always wise to have a knowledgeable tax professional to help you with filing.

How do trust tax brackets work?

Trusts are taxed based on income, just like any ordinary income taxes. The more taxable income your trust generates, the higher the tax rate.

Trust tax rates 2024

• Taxable income = $0–$3,100: 10%
• Taxable income = $3,100–$11,150: 24%
• Taxable income = $11,150–$15,200: 35%
• Taxable income = $15,200+: 37%

The tricky part is that a trust is taxed at multiple levels. For instance, if your trust generates $20,000 in taxable income, you will be taxed 10% of $3,100 ($310) AND 37% of the remaining $16,900 ($6,253), which totals up to $6,563.

Long-term capital gains trust tax rates 2024

There are three brackets for long-term capital gains:

• Capital gains = $0–$3,150: 0%
• Capital gains = $3,150–$15,450: 15%
• Capital gains = $15,450+: 20%

Trust tax rates 2025

Trust tax rates are adjusted from year to year to account for inflation, so it's important to keep track of the current year's rate. Here is what you will pay in 2026 for the 2025 tax year:

• Taxable income = $0–$3,150: 10%
• Taxable income = $3,150–$11,450: 24%
• Taxable income = $11,450–$15,650: 35%
• Taxable income = $15,650+: 37%

As mentioned before, trusts are taxed at multiple levels. This means that if your trust makes $15,000 in 2025, in 2026, you will pay:

• 10% of $3,150
• AND 35% of $11,850

This brings you to a grand total of $4,462.50 in taxes due.

Long-term capital gains trust tax rates 2025

• Capital gains = $0–$3,250: 0%
• Capital gains = $3,250–$15,900: 15%
• Capital gains = $15,900+: 20%

If you are unsure of how to calculate your trust tax rate, contact a tax professional who can help you get it done right.

What tax deductions can trusts claim?

Fortunately, trusts can claim deductions to minimize taxes just as individuals and businesses can. There are several deductions for trusts:

Contributions and gifts

If Great Aunt Sally or someone else contributes to your trust, it is assumed that she has already paid taxes on that money, and therefore, it doesn't need to be taxed again. You can deduct any gifts that were contributed to your trust when you are adding up the total income.  

Trustee management

Many people and companies opt to hire a trustee to manage their trust. The trustee can be an individual or a company, like a bank or wealth management firm. The going rate for a trustee is typically 1–2% of the trust’s assets annually, an hourly rate, or an annual flat fee. Whatever the fee is, the trust can deduct it from its taxable income.

Tax preparation

Since trust income tax rates are a bit more complicated than ordinary income tax rates, most trusts will hire a professional to handle their taxes and make sure everything is accounted for and done correctly. The trust can deduct these costs from its taxable income.

Charitable donations

One of the easiest and most rewarding tax deductions is a charitable donation. The grantor or trustee can choose a cause or organization and make a donation in the trust’s name. The donation not only goes to a good cause but also counts as a tax deduction. 

Income distribution deductions

Since beneficiaries pay taxes on income distributions, these distributions are tax deductible for the trust. This avoids double taxation. 

Any probate fees, local and state taxes, or real estate repairs the trust pays are also tax deductible. If you’re not sure what deductions you have, consult with an estate or tax professional to clarify any uncertainties. 

How to start or manage a trust

It's never too soon to protect your estate and plan for the future. If you're ready to start or expand your trust, contacting an estate planning attorney is the best way to start. A professional will help you set up the trust that will best meet your needs. You can also use a dedicated trust preparation service like LegalZoom, which offers two estate planning packages to fit your needs and budget—all backed by our experienced attorneys.

FAQs

Do all trusts pay taxes?

A trust is a separate legal entity that has to pay taxes on any income. Just like ordinary income tax rates, trust income tax rates are divided into brackets—the more you earn, the more you pay in taxes. Trusts that don’t generate income over $600 are not taxed. 

Who files the tax return for a trust?

The executor or trustee of the trust is typically responsible for filing taxes. Only trusts producing more than $600 in gross income need to file. 

Can a trust claim tax deductions?

Yes, any fees or expenses associated with the assets in the trust can be deducted for federal income tax purposes. This includes state and local taxes, trustee fees, probate fees, or repairs on real estate. Charitable donations, income distribution, and contributions can also be deducted from the taxable income. 

How are capital gains taxed in a trust?

Capital gains are taxed in brackets based on the trust’s or grantor’s income and the amount of time they held the asset. An asset held for less than a year before selling is classified as a short-term capital gain and can be taxed anywhere from 10% to 37% depending on the trust’s or grantor’s income bracket. An asset held longer than a year is classified as a long-term capital gain and can be taxed anywhere from 0% to 20% depending on the trust’s or grantor’s income bracket.

What are the tax advantages of a trust?

Trusts can significantly mitigate estate taxes and help you or your family avoid probate. The tax advantages are different for each type of trust, so it’s important to consult with an estate planning professional to figure out which type is best for your situation.