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
Buy on Amazon
Take courses on Udemy
Study resources on AchievableRelated 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.
Your AI study companion · 10 free interactions a day
Stay Updated
Get free exam tips and study guides delivered to your inbox.