How are trusts and estates taxed on income?

Taxation on trusts is dependent on numerous factors, including the size and value of the trust, and the way it is structured.


Taxation on a trust is generally dependent on whether or not they are considered a grantor trust, and the income they generate if they are a non-grantor trust.

  • Grantor trusts are not recognized as an entity by the IRS – all tax characteristics are instead passed on from the trust to the Grantor.
  • Non-Grantor trusts are taxed as an entity, and are required to obtain an EIN from the IRS in order to file returns and maintain bank accounts.
  • Taxation rates are far more advantageous for Grantor trusts, as they are taxed at individual rates rather than entity rates.


Trusts do not pay taxes on distributed income – the receiver of the distribution is responsible for the taxes on that income instead.

  • It is important, then, to ensure that the Grantor’s trust document makes active distributions to lower the trust’s tax burden, as it will only pay taxes on the retained income.
  • Non-Grantor trusts start paying the highest federal income tax rate for income above $12,950.00.


Estates are taxed very similarly to Non-Grantor trusts, including having to pay income tax on retained income.

  • For this reason, estates should be administered quickly, in order to distribute as much of the estate’s income as possible.
  • Estates have the ability to apply for a lengthened or shortened tax year if the administration process runs longer or shorter than expected, within reason.
  • Estates with a total value over $11.58 million are subject to an additional estate tax.


Specialized trusts can occasionally receive a different type of tax treatment under certain circumstances.

Intentionally Defective Grantor Trusts straddle the line between Grantor and Non-Grantor trusts, in that they are considered a separate entity for estate tax purposes, but a Grantor trust for income tax purposes.

Michael Faehner

Michael J. Faehner

Michael J. Faehner is the founder of Faehner PLLC in Oldsmar, Florida. Michael focuses his practice on estate planning, corporate,…

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