Trust Taxation
Trusts are taxed at compressed income tax brackets, reaching the top rate of 37% at just $15,200 of income (2025). Simple trusts must distribute all income annually. Complex trusts may accumulate income. Grantor trusts are taxed to the grantor.
Exam Tip
Trust brackets are compressed: 37% at $15,200. Simple = must distribute all income. Complex = may accumulate. Grantor = taxed to grantor. Distribution deduction offsets trust income.
How are Trusts Taxed?
Trusts are separate taxpaying entities with highly compressed tax brackets, making it expensive to accumulate income inside a trust.
Trust Types and Taxation
| Type | Income Distribution | Taxed To |
|---|---|---|
| Simple trust | Must distribute all income annually | Beneficiaries |
| Complex trust | May accumulate income | Trust (accumulated) / Beneficiaries (distributed) |
| Grantor trust | Varies | Grantor (all income) |
2025 Trust Tax Brackets (Compressed)
| Taxable Income | Rate |
|---|---|
| $0 - $3,150 | 10% |
| $3,151 - $11,450 | 24% |
| $11,451 - $15,200 | 35% |
| Over $15,200 | 37% |
Distribution Deduction
Trusts receive a deduction for income distributed to beneficiaries. Beneficiaries report distributed income on their returns (often at lower individual rates).
Exam Alert
Trust brackets hit 37% at just $15,200 (vs. $609,350 for individuals). This creates incentive to distribute income. Simple trusts MUST distribute all income. Grantor trusts are ignored for tax purposes -- all income reported on grantor's Form 1040.
Study This Term In
Related Terms
Estate Tax (Federal)
The federal estate tax is a tax on the transfer of property at death, applying to estates exceeding the exemption amount ($13.99M in 2025, $15M in 2026) at rates up to 40%.
Testamentary Trust
A testamentary trust is a trust created through a last will and testament that does not come into existence until the death of the testator, at which point it becomes irrevocable and must pass through the probate process.
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