Trust Tax RatesTrust tax rates are outrageous. (See table of Trust Tax Rates below.) There are two types of trusts: a simple trust and a complex trust.  The type of  trust you get will determine whether or not you are subject to trust tax rates.

Simple trusts  include the standard estate planning “living revocable trust,” and many other trusts. One example is a Living Revocable Trust or Family Trust. Simple trusts are often used in estate planning to hold property. Most of them are revocable.

Simple trusts usually do not have a tax ID number. If a tax ID is asked for, the grantor/trustee/beneficiary’s Social Security number is used. A simple trust is required to pay all of its income out every year to the beneficiaries. Technically, a simple trust can’t accumulate income.

On the other hand, a complex trust can accumulate income and make its corpus (trust estate) grow. Because complex trusts can accumulate income, they are required to have their own tax ID number. This will need to be an EIN.  Even though complex trusts can accumulate income, it’s usually not wise to have the trust actually do so, because the trust will be taxed on the income it accumulates. With trust tax rates hitting 37% at only $12,500 it’s not good to pay taxes out of a trust. Additionally, the 3.8% Obama-care surtax kicks in at that same “top” level. Obviously, trust tax rates are outrageous.

Any trust, either a complex trust or a simple trust, gets a tax deduction for money it pays out to the beneficiaries. Thus, it is relatively easy to “zero out” a trust’s income and avoid paying taxes on trust money. A complex trust may have to file a 1041 tax form, but if there isn’t any income retained in the trust, the tax will be zero, even if a 1041 form is filed.

Note that when a simple trust says all of its “income will be paid out at least annually,” that doesn’t mean the money has to be transferred from the trust’s accounts to the beneficiary’s accounts. It simply means that the beneficiary(ies) have to claim all of the income on their tax return(s). Thus, a simple trust does not retain income, at least as far as the IRS is concerned.  Yes, the money will still be in the trust’s account, but it has been recognized as paid out by having the beneficiary claim it as his or her income.

Think twice before letting your trust get into a position where it is subject to a tax liability. Tax rates for a trust are bad news.

Trust Tax Rates Table

If taxable income is: The tax is:
Not over $2,750 10% of the taxable income
Over $2,751 but not over $9,850 $275 + 24% of the amount over $2,750
Over $9,851 but not over $13,450 $1,979 + 35% of the amount over $9,850
Over $13,451 $3,239 + 37%  of the amount over $13,450

The rates in the table were set in the Tax Cuts and Jobs Act and updated for 2021 cost of living increases. These rates apply to estates and trusts. The Obama-care net investment income tax of 3.8% started in 2013 and applied to trust income above the $12,150 level.  Trust tax rates have been inflation-adjusted each year, so note that the rates in the table above are for 2020 and check for the year you are interested in. The rates are set to go back to 2017 rates in 2025.

For great tax saving ideas, check out my 10 Tax Tips.

Note: This post was updated on September 13, 2018.

  1. Hello Mr. Phillips, Thank you for your informative article. However does retention of money in the trust (while figuratively transferring income to the beneficiary for tax purposes) apply to complex trusts and if so can capital gains be included?
    Thanks, Henry

    • Henry,
      Complex trusts are their own taxing entity. They need a tax ID and file a tax return. The only way they get a “deduction” for money paid to the beneficiaries is to actually transfer money out of the trust’s accounts to the beneficiaries ownership. The living revocable trust doesn’t require actual transfer, because it is a grantor trust and is “invisible” to the IRS. As long as you claim the income in the living revocable trust, the IRS considers it paid out of the trust.

  2. Hi Mr. Phillips, thank you for all the information on this complex subject. My dad passed away on 1/5/14 and had a simple trust in place. He had a pension of $175,000, which we received a 2014 1099-R form for. The name on the form is the family trust name. The pension was taken out in April of 2014. Should this be included on my dads 2014 final personal tax return or should it be on a trust tax return. There are three beneficiaries to my dads estate, one of which is living in Europe. There is no other income from the estate only a savings account with some cash. There is also his house in the trust, but I think this would be non taxable since the income from the sale would be less than the $250,000 non-taxable amount. Thank you for any help you could shed on our situation.

    • Jan,
      Your dad and the family trust are the same person. If it was paid as a death benefit, it should go tax free to the family. If it was a lump sum from the pension, probably as with 1099R, then it is income to him in his final return. If the trust paid it out to the beneficiaries, the income could have shifted to them. I don’t know. This isn’t much help, I know, you are going to have to get the accountant that files the final tax return to dig into it.

  3. I’m the trustee to my fathers irrevecable special needs trust. He passed in 2014 and the trust assets were all distributed according to the trust documents to individual beneficiaries. Can the trust pay the taxes owed on the income generated from the trust assets? the trust documents don’t address this. There is only $6000 in income. Also federal taxes were withheld – too much on the 1099r.

    • Bella,
      The trust should be filing tax returns since it is irrevocable. Any income not paid out to the beneficiaries would have been accumulated in the trust and the trust would have to pay taxes in its tax return. If the money was all paid out to beneficiaries, then the trust gets a tax deduction for what it paid out and no taxes would be owing. The tax rate on even 6k is probably 28% which may be more than the individual rates of the beneficiaries.

  4. Mr. Phillips, My two siblings and I have an ILIT which was funded with the proceeds of a life insurance policy upon the loss of our Mother this year. Two of us are likely, personally, already at the highest tax bracket. A third sibling is not. Is there any advantage to our “taking the interest income dollars out” (figuratively, as you explain in your video), if we are already at the highest tax rate, or is it a wash for the two of us? Conversely, should we transfer the income to each of our 1040s, regardless, to help our third sibling so that they have less tax-loss? Or is there a third option? Thank you, Jeff

    • Jeff,
      If the trust says it is to be divided three ways, then the distribution is probably set in cement. The two of you who are in the highest tax bracket need to call Ben Rucker, a 7-year special auditor of the IRS, an accountant and part of our office team (although he is independent). Call my office at 801 802-9020 and they can put you in touch with him. He does wonders for tax payers over and above what you get from run-of-the-mill-plug-in-the-numbers-CPA-type tax preparers.

  5. Mr. Phillips,
    We funded our revocable living trust 2 years ago with our rental condo and other assets. We’re now thinking about either doing a Section 1031 Exchange or selling the condo and having to pay Federal tax. We prefer to sell if the tax bite is not severe. All trust income is reported under our SS# on Form 1040. We are co-trustees and makers of the trust and deposit rent checks both in our personal bank account and trust bank account interchangeably. Would the capital gain rate be taxed at a higher trust rate or at our personal 1040 joint return rate? Either way, do we need to transfer title for the condo back to ourselves the way it was originally in our H&W joint names? Our 2015 AGI including the condo gain is not likely to reach $150,000. Thank you for what you can advise.

    • Pat,
      See my answers in bold embedded in your comment below:

      We funded our revocable living trust 2 years ago with our rental condo and other assets. We’re now thinking about either doing a Section 1031 Exchange or selling the condo and having to pay Federal tax. We prefer to sell if the tax bite is not severe. [Lee Phillips] The tax rate is probably lower now than it will be in the future. All trust income is reported under our SS# on Form 1040. [Lee Phillips] That’s how it should be. If this is a living revocable trust, it is a grantor trust and invisible to the IRS, until one or both of you die. The 1031 should be no problem, since the trust is invisible. We are co-trustees and makers of the trust and deposit rent checks both in our personal bank account [Lee Phillips] You shouldn’t have a personal account. To avoid probate, your accounts should all be “owned” by the trust. Because the trust is invisible to the IRS, courts and everyone else, there is no need to distinguish between your accounts and the trust’s accounts. The accounts are your accounts for all practical purposes, but offer probate avoidance because they are held by the living revocable trust, which would turn into an irrevocable trust after you die. and trust bank account interchangeably. Would the capital gain rate be taxed at a higher trust rate or at our personal 1040 joint return rate? [Lee Phillips] A living revocable trust does not have a tax presence. It is you and your social security numbers. There is no tax rate for this trust. Not only should it be a living revocable trust, it should have provisions in it that say you will “pay out” all of the income. That doesn’t mean you transfer bank accounts. It means you “pay out” and recognize the income as yours on your tax return. If the trust can’t accumulate income it is called a “simple trust.” Either way, do we need to transfer title for the condo back to ourselves the way it was originally in our H&W joint names? [Lee Phillips] You can sell or do the 1031 directly from the trust. Our 2015 AGI including the condo gain is not likely to reach $150,000.

  6. Great article, but I have a question.
    If there is a trust set up for minor children (who happen to be citizens and residents of Chile), how is annual trust income taxed? Can I assume if it is actually annually distributed, the children or their guardian will pay whatever income tax is assessed in Chile and the trust will still get the deduction? In this case, if the children claim the income in chile, does the distribution actually have to be made?

  7. Hello,

    I have a trust that is likely to have UBTI in the future. Does the Trust Tax Rates Table shown above apply to the UBTI and will there be any other taxes on the UBTI?

    Also, are there any other areas of concerns I should be looking at with UBTI and trusts?

    Thank you!

    • Lisa,
      Yes, the rate table would apply to UBTI (Unrelated Business Taxable Income) except for the percentage of profits that are attributed to the outstanding loan percentage at the sale of leveraged real estate which would be taxed at the long-term capital gains rate.

      There should be a provision in the trust that authorizes distributions to the beneficiaries. That should give the trust a deduction, which if zeroed out the trust will not have to pay taxes, because it won’t have a profit. I don’t understand all of the issues around your UBIT, but generally, you will pay out everything and leave the trust with no income in a year. You also might watch out for Unrelated Debt Finance Income (UDFI).

  8. My brother had a 401 k it’s in the trust. so the check has to go into the account set up for everything else which was not taxable. Now all the 401 k over 450,000.00 I have 2 sisters, I am the trustee. When I give them the check can I let them pay the taxes or do I have to pay the taxes at the trust tax rate. I know we have to pay all the taxes but who? Thanks

    • Debbie,

      The trust will pay out the money, and it should get a tax deduction for the payment. The payment will be taxable as ordinary income to the beneficiary receiving it, but the trust shouldn’t have to pay taxes at its rate.

      Generally, taxes on taxable income must be paid either by the trust or by the beneficiaries, but not both. If the trust retains income beyond year-end, then the trust must pay taxes on it. However, if the income is distributed, then the beneficiaries pay taxes on it and the trust is permitted to deduct it.

  9. Lee,

    Your article states the following: “Thus, a simple trust does not retain income, at least as far as the IRS is concerned. yes, the money will still be in the trust’s account, but it has been recognized as paid out by having the beneficiary claim it as his or her income.” I have usually found this to be true.

    I’m working with a situation where Trust Accounting Income (TAI = $5,000 and only amount paid out) is less than DNI ($8,000) due to limited itemized deductions. If I use $5,000 as the amount required to be distributed, this leaves $3,000 taxed to the trust. Is this correct or am I missing something? Thanks

  10. My mother died last year leaving a trust that was to be split into separate trusts for her 6 grandchildren which is about to happen. I read somewhere that if trust capital gains were treated as income to the beneficiary the first year of a trust it could in all ensuing years. Is this the case. Would it apply to the separate trusts that are being created more than a year after her death and is there any value to doing this.

    • Katherine,
      It all depends on how the trust is written. If the trust allows you to have the beneficiaries recognize the income then you can have the income from the trust treated as income to the beneficiaries. The problem is that you may not be able to do this if there are restrictions on how you can distribute out income from the trust. You will need to read the trust carefully to figure out what you can and cannot do.

  11. 1. for a complex trust, if I want to zero out the income, does that mean I need to actually transfer out to the beneficiary an amount equal to the non qualified dividends and/or capital gains?

    2. In one trust that has capital loss carryforwards, I just want to transfer out the non qualified dividends. Can I be this specific?

    3. does this need to be done before 12/31 or before the tax filing deadline?

    • Will,
      In answer to your questions:
      1. for a complex trust, if I want to zero out the income, does that mean I need to actually transfer out to the beneficiary an amount equal to the non qualified dividends and/or capital gains? You do have to allow the beneficiary some control over the income. The beneficiary can leave the money in the trust but recognize it as income. If you don’t allow them to have some control over the money it is not income to them.

      2. In one trust that has capital loss carryforwards, I just want to transfer out the non qualified dividends. Can I be this specific? If you assign the actual right to the dividend to the beneficiary yes. Once the money is already been paid to the trust and is in the trust accounts you wouldn’t be able to separate it out.

      3. does this need to be done before 12/31 or before the tax filing deadline? Technically it needs to be done before 12/31.

  12. Situation:
    Father set up a living trust. Second wife is to receive income from the trust after death. Dad passed away last year. I am trustee. It is not an A/B trust. When second wife passes, principal (if any left) to 4 biological father’s children.
    1.) Bulk of principal was in annuity, cost basis $25K, “death” benefit $190K. All but $25K is subject to trust tax rate “when distributed” (?) Currently in a 5 year deferred account with annuity company trying to figure out what to do.
    2.) Other investment “income” paid out to second wife is taxable at the trust rate. (?) And then does second wife also have to pay income tax on the “income”.?
    Special question:

    Why can the income go directly to second wife and the taxes paid at her rate.

    Help and Thank you!!

    • Karen,

      When a trust makes income it pays taxes on that income, but if a trust distributes that income that is a tax deduction for that income. That means that if the trust distributes the income to the beneficiary in the same tax year as the income comes in there will be no tax for the trust ($0). It will show the income on a tax return and then deduct it all as a distribution.

  13. Very informative. Is there any way to distribute principal only?
    The trust would pay the full tax on income, but the beneficiaries could receive distributions tax-free?
    This is because there are dozens of beneficiaries, many overseas.
    In order to simplify things, we would like the trust to pay the income tax (realizing that the overall tax will be higher).
    It appears that any distributions to beneficiaries are assumed to be income-first, but can the trust elect to forego the income distribution deduction and pay the tax?
    It is an irrevocable trust to be dissolved next year, so perhaps we need to wait until next calendar year to make distributions.
    Thank you for your insight.

  14. Mom and Dad established a revocable trust in 1991 and put all assets in the trust. Mom passed away in 2005, so the trust split into B (my Mom’s half) and A (which dad revoked and made his personal account). Dad served as trustee for Trust B, held for the four siblings, and I guess it was treated as a simple trust, taxed along with his income each year. Dad passed away in Feb 2016. He was nowhere the level to incur estate tax. His stocks received the step-up basis.

    What about the basis for the stocks in Trust B? Is there a step-up, or is it basically determined by their values on the date of my Mom’s death (plus whatever buys and sells Dad conducted since that time)?

    Thanks for your help.

  15. Using schedule D, Part V to determine taxes on short term and long term capital gains and qualified dividends totalling $3185, I came up owing $167 total or a blended tax rate of 5% plus change. This matches IRS 1041 instructions which on page 1 (or 2) under “Changes” indicates that the tax rate on the first 2500 “continues at 0% . This contradicts the schedule G table of 15% !!?

    • Mike,
      The trust tax rate table represents the maximum % you could be charged for trust income at that income level. Because of all the different rules that apply to capital gains the actual percentage that you pay is usually lower then the maximum %.

    I just completed the 1041 for dear friend who passed in May 2015. Trust left specified money gifts to grandchild, two grandchildren, and a charity. Last gift is $300/mo to other grandchild. There was not enough money available, so I paid half of each specified gift before December. No K-1 because no requirement to pay anything at any specific time. The total income to the trust was only $1200, which was taxable at the enormous rate of 15%!
    What I want to do is pay out the rest of the specified gifts in 2016, again with no k-1, but then change to a flow-through tax when I start paying the other grandchild. Can I do that? (Reason is that the first grandchild would have tax consequences for the gift, if taxable. The grandchildren and the residual beneficiary would not.)
    Only income to the trust will be a small trickle from a limited partnership that is tied up in real estate. If I can talk them into a capital distribution at any time, I will do so. And no, because of the market right now, it is not feasible to discount the investment and just sell it, at least not at this time.

    • If there is income being made, someone has to pay the taxes. If you distribute the income to the beneficiaries, then the taxes flow through to the beneficiaries and they are responsible for paying them. If the income is kept within the trus,t then the taxes would have to be paid by the trust. There is no way of not giving a K-1 if you are giving income to the beneficiaries. You could assign all the income to the charity and then have the grandchildren get principal from the trust. The charity may not have to pay any taxes.

  17. I am setting up (3) trusts for three relatives with the primary purpose of supporting their retirement. One of the beneficiaries be quite young (maybe in her 30’s) when the trust kicks in. I wish to have her receive only a small amount annually until she is at least in her 50’s. My initial thinking is to leave any additional income that would result in income taxes to the trust, to a charity of my or her choosing. Do you have any comments on this approach. Do you have any other ideas for dealing with the tax issue while preserving more of the trust for her later years.

    Thanks for your interest.

    • You can keep the income in the trust and pay the taxes on it. It may be more taxes then you like, but it would keep part of the income in the trust and allow it to keep growing.

      On the other hand, if you give all the income to a charity, you are paying out 100% of the income where taxes would only be about 40% at most. If your goal is to provide for charity, then your plan would be a great idea. But if your idea is to avoid taxes, then you are going to end up losing money trying to avoid them.

  18. Hi Lee-
    Can you clear up my confusion? Sorry- I didn’t read all your Q & A
    I may be setting up a trust soon w/out counsel. (long story)
    Anyway, I was confused by the statements below under “simple trusts.”
    “Not allowed to distribute corpus” I thought it was the opposite for simple trusts!
    This info is off pg 1/4

    Simple/Complex Trusts

    Simple Trust:

    Trust that is required to distribute all of its annual income to the beneficiaries.
    Beneficiaries cannot be charitable.
    Income of the trust is taxable to the recipient, even if left in the trust to accumulate.
    Not allowed to distribute corpus (principal).
    Capital gains are considered part of the corpus.

    Complex Trust (must have one of the following):

    Retains current income in the trust.
    Distributes corpus.
    Distributions to charitable organizations.
    *Both the Simple and Complex Trusts are given deductions for the income distributed to beneficiaries, and both trusts are granted the standard exemption amount of $100.*

    • A simple revocable trust can do pretty much anything they want with the corpus of the trust. If it is a simple irrevocable trust then you have to be careful about what you do with the corpus. (The corpus is the written text.)

  19. Mr. Phillips,

    Say a non-grantor trust earns both taxable income and tax-exempt income (i.e. municipal bond interest) – for example, it earns $20,000 in taxable interest and $80,000 in tax-exempt muni interest.

    Is there a way where the trustee can make a $20,000 distribution to the beneficiary and have that entire distribution deducted against the taxable income? The result I’m trying to get would be to have all the taxable income taxed to the beneficiaries, but have all the muni-income retained by the trust.


    • Ben,
      It can be done but you have to make sure all your book keeping is correct. You may want to work with a capable accountant to help you make sure you get it right.

  20. Hello Mr. Phillips,

    My mother-in-law set up an irrevocable trust for her daughter (my wife) in 2013. My mother-in-law is grantor and trustee; I just do her taxes. The trust is not required to distribute corpus and interest until my wife reaches 65 (currently 55). As trustee my mother-in-law can exercise discretion over additional distributions at any time. As described, this would be a complex trust, correct?

    The trust earned $1400 in income and capital gains in 2015. Unsure what to do for an irrevocable trust at the time, I paid estimated taxes and filed an extension. I have since done some homework about trust taxes, and I think I have a handle on this. Could you please recommend a tax software to handle filling in forms and filing? TurboTax Business seems to be my best option (but pricey). TaxAct lacks my state forms, and H&R Block has poor reviews. I currently use TurboTax Deluxe.

    Also, I have a possible problem to deal with –
    In 2014, the trust earned $900 in income and capital gains. Last year then, unaware of the tax implications, I treated the trust as a typical revocable grantor trust. I simply added the income to my mother-in-law’s return and she she paid the taxes. This April, I realized my error. My question is, does the IRS really want me to correct my mistake by amending her individual return and filing a 2014 trust return? They got their taxes, and it is such a small amount. What would you advise?
    Thank you very much.

  21. “Note that when a simple trust says all of its “income will be paid out at least annually,” that doesn’t mean the money has to be transferred from the trust’s accounts to the beneficiary’s accounts. It simply means that the beneficiary(ies) have to claim all of the income on their tax return(s). Thus, a simple trust does not retain income, at least as far as the IRS is concerned. yes, the money will still be in the trust’s account, but it has been recognized as paid out by having the beneficiary claim it as his or her income.”

    But if the income from a simple trust is NOT distributed, the amount not distributed (and retained by the trust) will be deemed a contribution to the trust by the beneficiary who is entitled to the income, thereby creating a partially self-settled trust which will compromise some (if not all) of the asset protection otherwise associated with a third-party spendthrift trust.

    • Scott,

      If you are using more complicated trusts such as one used for asset protection then you will need to distribute out the income. You can leave the income in the trust if you are using simple living revocable trusts.

  22. “If you are using more complicated trusts such as one used for asset protection then you will need to distribute out the income. You can leave the income in the trust if you are using simple living revocable trusts.”

    I agree that, as to a revocable trust, it doesn’t matter if the income is retained or distributed but, because such trusts are classified as “grantor trusts” (at least during the grantor’s lifetime), they are neither complex or simple and the content of this article is irrelevant. The income from a grantor trust is reported directly on the grantor’s IRS Form 1040 and is never subject to trust income tax rates.

    • Scott,
      You are lumping grantor, simple, and complex trust all together and saying that a trust can only be one of the three, which is incorrect. A trust is either a grantor or non-grantor trust and a simple or complex trust. You can have a grantor trust which can be classified as a complex trust.

  23. What is the general cost to create or set up a complex trust?

  24. Parents created Rev Liv Fam Trust 1979, complete restatement 1984. Dad died ’86, Mom now 96 yo. I have durable POA. Bank accts & partial house all in trust. Six non-qualified annuities, trust is owner & beneficiary. Two annuitizing. Taxable income on mom’s 1040. Been advised to change beneficiaries to be brother & myself. Good idea or not? Bigger question, do trust assets values get taxed first, then distributed to beneficiaries? Or is there time window after mom dies to distribute trust assets to bens, then comes the tax consequences? Copious research only adding to my confusion! Thx!

    • Jan,

      While your Mother is still alive the income goes on her 1040 like you have been doing. Once she passes away the trust will become irrevocable and taxable. If income from a trust is distributed to the beneficiary then the beneficiary pays the income tax. If the income is not distributed then the trust pays the income tax.

      Usually after someone dies with a living revocable trust, the successor trustee takes care of the trust assets and distributes them out to the beneficiaries in a few months time. If this happens then any income that may have accrued from the trust assets will have been distributed to the beneficiaries.

      If the trust continues to hold assets for a longer period of time, the income can still be assigned to the beneficiaries. Each year the trust will give a K-1 to each of the beneficiaries. On that K-1 the trust can assign income to that beneficiary. By doing this the trust can assign out all of the income to the beneficiaries and have 0 income to report to the IRS.

  25. I am a beneficiary to my Great Aunts trust and she required that my portion be in a “separate share trust”. The attorney was required to give me a Certificate of Trust per the bank in order to set my trust account up. I used my SSN and do not have a TIN. The attorney and accountant (my Great Aunts Trustee) told me I can take out the money the very next day and do with it what I will. Do I pay taxes on the money when I withdraw and close my separate share trust account out?

    • Tresa,

      If the money is inheritance then there is no tax unless you live in one of the states that has an inheritance tax. As for income taxes, the trust is responsible for any income generated while the money is in the trust. The trustees can assign the income to you and give you a K-1, which means the income taxes are going to be paid by you. If you didn’t get a K-1 then you don’t have to pay taxes on the income of the trust. After the money is in your own account with your SSN then the money is yours and the income generated from that money is going to go on your tax return.

  26. Mr. Phillips,

    I am the fiduciary for a few small complex educational trusts. The trusts accumulates until the beneficiary needs it for college. The trust made $163 in Qualified Dividends and $725 in Long Term Capital Gains. When I run the numbers through the schedule D, I come out with zero tax due? Is this possible? Am I missing something?

    Thank you for your help!

  27. My wife has an irrevocable complex trust. The trustee deducts the administration fees from income and is reported on a 1041 as an expense. We receive a K-1 but there is no deduction given for the trustee expenses. Does this mean we are unable to deduct them?
    Thank you.

  28. If an Irrevocable Trust has investments that are QDI taxable which are taxed at 15 % or 20% depending on income level, does the trust pay tax on the income at the QDI rate of 15 or 20% or the trust tax rate which is up to almost 40% for 2016?

  29. Mr. Phillips, my mother established a revocable trust in 2005 and funded it with her home and other accounts. She just sold her home. The proceeds have been deposited into one of the trust’s bank accounts. She wishes to purchase land with a portion of the proceeds and deed the land to me. Is this taxable to me?

    • Kathy,

      If she purchases the land and then deeds it to you, it is a gift. There is a gift tax that the person giving the gift is responsible for. The gift tax subtracts from the amount that can be passed after death. Right now that amount is $5.49 million. As long as the gift value us less than that then there is no actual tax that needs to be paid, but form 709 will need to be filled out and filed with the IRS. If the gift value is less than $14,000 then nothing needs to be done.

  30. Mr. Phillips, our daughter was in a serious accident several years ago and as a result was awarded monetary damages. I setup a revocable trust for her with me as trustee and placed the money in an investment account with a brokerage firm. That account made just under $5K in dividends in 2015. Being inexperienced in this, I assumed that because the trust was a separate entity and sis not make much money, I did not file a tax return for the trust. To exacerbate the situation, when the account was set up, it was not setup with a separate tax ID and my SS# was used for the account. The IRS just sent me a notice, as it assumed because of my SS# on the account, that the dividend income was mine. Does the trust owe taxes even if it only made a small amount of money in the tax year? Am I responsible for the taxes or is it the trust? The trust has been liquidated and all the money had been turned over to my daughter in 2016.

    • If the trust made income, then it needs to file a tax return even if there is no tax owed just to be on the safe side. Your problem isn’t that the trust didn’t file a tax return but that the income from the trust showed up under your SS number and is considered to be your income. You will have to see if you can get it figured out with the IRS, but they may consider it your income.

  31. My mother (died in Jan) has a revocable trust but two annuities (one qualified; one nonqualified) that name estate as beneficiary (approx total $17K taxable). With two bank accounts w/o POD, this means probate via Maryland modified admin. MD requires taxes to be paid before closing estate. When estate closes, all rolls over to Trust. Because I won’t get 1099s until Jan 2018, I can’t close estate until Feb when taxes can be done. I can’t distribute $$ until I close. I don’t see an IRA transfer as possible b/c it seems to require a private letter ruling to go from Estate to Trust to 4 beneficiaries under Trust. So it looks like a catch-22, in which my only recourse is to pay estate income taxes. I don’t see any way to distribute the money to my siblings so they could pay taxes individually. Do you agree? It’s not a lot of money, I just want to know before I make an irrevocable decision. Thank you.

  32. My husband passed away 5/15/17. He left a 1 million life insurance policy to me which is in a few money market accounts. He left a 2 million life insurance policy to me as primary which states I can disclaim the funds to the trust under the will for my benefit.
    If I invest the monies in a private company under a trust, am I taxed on the income from the trust at a corporate rate of 39.6% if the income is dispersed to me or am I taxed at my regular income tax rate?
    Thank you

  33. You say “income must be transferred to beneficiary” to avoid the trust paying tax. I think that the income does not have to be actually transferred from an investment account if the income is listed as ‘transferred’ on the appropriate K-1 forms and the taxes paid by the beneficiary. Do you agree.
    Thanks for a great article. Best I could find on the web.

    • Forrest,
      In order for the income to be transferred, the money must be available to the beneficiary if they choose. They can choose to leave the money in the account and have it reported on their K-1. You can’t just assign them the income on the K-1 and expect them to pay the taxes if they do not actually have the choice to obtain the assigned income.

  34. I am the trustee to my mother’s estate and there is a testamentary trust for my sibling, my mother declares in her Will. We are just coming up on the first tax year and we did have a EIN taken out for the trust, I remember my lawyer stating: IN CASE YOU WANT TO USE IT… I had the freedom to actually disperse the all the monies (approx. 155K) in lieu of creating the trust but my sibling chose to put it in a trust to maintain separation from a rocky marriage… It does seem to be the best to do this as a Simple vs a Complex.

    I am assuming the precedence is set at the end off the first year. I can do away with the EIN number and treat as a Simple and disperse the funds to my sibling… or I can use the EIN and let the trust assume the expenses, hence is a Complex… Is this correct in my thinking? It all depends on how I approach I use the 1st tax year, yes?

    • Nate,
      Just because you have a simple trust does not mean you don’t have to file a tax return. For the IRS, a grantor trust does not have to file a tax return. A grantor trust is one where the grantor, beneficiary, and trustee is the same person. In your situation they are all different people. Being a simple trust simply means that the trust disperses all of its income to the beneficiaries each year. You will need to file a tax return no matter what you do, it just depends on if there will be all zeros on the return or if there will be income on the return that will be taxed.

  35. I am the executor of my father’s now irrevocable living trust in California. He passed away about a year ago in 2016. In the trust is comprised of parcels and a manufactured home which is not on a foundation, hence it doesn’t have a 433A. The manufactured home, which is permitted, is also over thirty years old. AFAIK, I can’t get a loan on it and it makes it more difficult to sell it because it’s not affixed to the property, so it’s considered just land with property on it. We are having financial difficulties so there’s pressure to sell.

    If we sold, how would the taxes be calculated? Is the selling price taxed immediately or can it be reinvested without being taxed? … then the disbursements to beneficiaries would be taxed? Would living in the home for two years out of five help in this situation?

    • Truth,
      When your father passed away you would get a step-up in basis equal to the fair market value of the property when he passed away. If you get the property appraised that can establish what the basis is going to be. If you sell the property for that fair market value then there would be no tax due. Also if you live in it for two years you could qualify for the personal residence exemption.

  36. my father died in October. He had his assets in a revokable living trust, with half to go to me and half to be held in trust for my minor children. When I set up the testamentary trusts for the children, does his trust get closed out? The monies are primarily in the form of outstanding mortgages, so the money will continue to come into the testamentary trusts for many years as the mortgagees continue to pay their mortgages.

    • Marijke,
      It depends on how the trust is written. If the trust creates a new trust that is held for the children, then the original trust will go away and the new trust will continue. If the trust is written such that the original trust will continue and hold the assets for the children, then the original revocable trust just changes to irrevocable and continues on.

  37. My father-in-law created a revocable family trust. When he died, the trust became an irrevocable trust and it specifies that the trust pay all its income quarterly to his surviving spouse. Upon his wife’s death, the trust is to be divided among the six children of his and his wife’s (from a former marriage) .

    Do the trustees of the trust have a present obligation (while the wife is still living) to notify in writing the individuals listed in the trust as beneficiaries (i.e., the six children), that they are listed in the trust as such? If so, are the trustees required to provide those individuals with a copy of the trust document?

    Are the trustees required to provide any reporting (either annually or otherwise) to the future beneficiaries (the six children), regarding the specifics of the property/investments in the trust or any disbursements made from the trust?

    The trust specifies that: “In the event that a child of mine fails to survive me, then his or her share of of the trust shall be divided into as many equal shares as such deceased child has then living descendants, per stirpes.”

    Do the beneficiaries have the right to pre-determine (by advising the trustees in writing or by a statement in their written will) how they would like their share of the trust to be distributed in the event they have predeceased the liquidation of the trust? This would be especially important to any beneficiary who has no children, or to a beneficiary who wishes to have part of their share of the trust distributed to a person or entity other than their children. If the beneficiaries have this right (as described above), do the trustees have an obligation to advise the beneficiaries of this right?

    • M. Emery,
      With long technical questions like these, it would be better for you to seek legal counsel directly. You can work with the law firm that set up the trust or call our office at 801-802-9020.

  38. Mr Phillips:
    My father-in law (grantor) had set up an irrevocable trust benefiting his two children few years ago and funded with two separate office properties. The grantor, trustee and beneficiaries have now decided to dissolve the trust and distribute the properties to the beneficiaries (an attorney was consulted and he didn’t see an issue). Questions:

    What will be the tax implication on the beneficiaries? The properties have appreciated in value since then they were transferred into the trust. Will the tax be on the current value of the property or the appreciated part? Who pays that; Trust or beneficiaries? What will be the trust tax rate in that case?

    What is the best way (structure) for the two beneficiaries to continue to own the real estate going forward?

    Thank you

    • Faisal,
      I don’t really have enough information to conclude what the ramifications would be. It may be best for you to consult a CPA who can crunch the numbers for your particular situation.

  39. Mr. Phillips,

    My father has a living revocable trust that will convert to a complex trust upon his death. He is now 95 and has an annuity in his name, as owner with the trust as beneficiary. The annuity has $73k in principal and about $60k in undistributed accumulated interest. This year, his annuity will annuitize and he must select a payout of the annuity balance to begin in September 2018. The option planned to be selected is “Life with Cash Refund”. That option will pay him a predetermined monthly amount for his remaining life with the balance (if any) of his account paid as a lump sum to his trust upon his death.

    All of his remaining assets are liquid in nature. Assuming the trust and his estate can be closed out within 12 months of his death and there is an undistributed interest balance in his annuity account as of the date of his death, can this remaining undistributed portion of the accumulated interest be considered a k-1 “flow through” taxable distribution to the heirs or will the trust be required to pay the tax on that interest in it’s final return?


  40. I do have a question regarding trusts.. Me and my brothers had a irrevocable trust set up in 1998. It’ was called a Dynasty trust that my mom is trustee of. It was in Harford Insurance company and because of the premiums being so high she elected to cash the policies in and put the monies into CD’s. The premiums would have basically eating up the monies in the trust. Hartford sent a 1099R for investment income for my trust and one of my brothers. The 1099R on mine was for $116,000+ and my brothers was $119,000+ which they advised would be taxable income. My mom is using her CPA and was advised that the state and federal total tax owed on my trust is over $51,000+. Her CPA said that there was an average of 39.6 percent on a scale basis for state and federal tax owed. The trust was set up that when each of us (me and my brothers) passed our kids would be the beneficiary. Does this sound correct that much tax would be owed?? What are your thoughts.. ?

  41. Hi Lee,

    Can you help me understand a few finite points of the irrevocable trust vs taxes.

    – I am striving to file this next year as a Simple trust, so I am trying to understand the finite points of “distributing the earnings” every year requirement.. You mention in the video that from the eyes of the IRS, (I paraphrase) one does not need to literally cash out and hand those funds to the beneficiary or another bank account… per se. I have also read that you can leave the funds accumulate…

    Now for my questions, I figure one cannot use the automatic reinvestment feature for earnings or interest.
    – Can you confirm? –
    – Does this automatically push this trust into the Complex category?
    – Can I merely take those accounted for earnings and distribute them at year end?
    – If i have the reinvestment feature invoked on those investments, can I change it today to make sure I can file as Simple at the end of the year? What are the finite rules on this?

    Once again, I am looking to do what I need to make sure I can file as a Simple trust next year….

    Thank you Lee!

    • Nitin,
      The assignment of income from the trust to the beneficiaries is done with a K-1. The money can stay in the trust but you assign the income using a K-1. The beneficiaries will need the option to remove the income they are assigned from the trust but don’t have too.

  42. Hi there Lee, Ok first off I had to send USPS Certified Legal Notice alerting the Trustee I was a beneficiary 17 months after the death of Settlor or Grantor and wanted a copy of Trust documentation. When I received the requested Trust it was just the Amendmened sections of Trust. I had to contact the Attorney who wrote the Trust. The attorney who wrote the Trust was not very concerned and his paralegal emailed me a copy. Not until I gave him USPS Certified Legal Notice asking a bunch of questions did he get on the defense and say I’m contesting the matter when all I wanted was documentation of what occurred. He fist stated he had no idea the value on the Trust that only Trustee TTEE knows. The Attorney who wrote the Trust and the TTEE said there was not a will. When the taxes showed up in the mail a copy of a will was now produced. The last contact the Attorney made over the phone with me he claims he wouldve known if Trust was 1 million or 6 million. Neither the Attorney or TTEE Trustee can keep the story straight. The Attorney told me he told the Trustee to hand over all requested documents to me I was entitled to them. l am aware that my Relative was worth a bunch more than one million closer to 5 or 6 million. The distribution has happened but without my signature of releasing my consent to a Tort or claim. Now the Trustee TTEE has hired a Estate or Probate litigation Attorney. This attorney is a criminal attorney as well and located in the same office building and share the same secretary answering phones for the two Firms. Do you think The Trustee should be replaced? I have not cashed the Check and will not sign the release of my consent or waive my rights to a tort or claim. The distribution was made anyway. This is a Complex Trust and after I started asking questions the Trust was distributed four or five months ahead of when I was originally told. The Trust still took 22 months to distribute and the value was only 1.3 million. The Trustee never gave me Notice of being a Beneficiary or annual accounting report and I wasn’t given any of the tax information or proof of all assets at time of death or location of assets. Not until after the final distribution occurred was any proof given to me Tax Documents. I have no idea how or with what assets the Trustee used to figure the total assets amount or where all the assets were located or what bank the safety deposit box was or who co-signed for deposit box. Nothing adds up when it comes to my Relatives assets. The Solo Trustee TTEE was also a beneficiary and for his duty and fee took her vehicle and 20 k note payable and total of 60k. The most import question I have is The first actual cash assets out of the Trust were Distributed to my brother and I. The exact wording is the Trustee shall distribute 1/8 of the assets in the Trust estate to my brother and I, in (2) two equal shares, per stripes; I have a lawyer friend not a Trust Lawyer who thinks that we each were to receive a 1/8 of total assets? Not split a 1/8? Also I have knowledge my Aunt owned a business and the TTEE Trustee and rest of family won’t respond when I ask or text them asking if and how they didn’t know My Relatives was a part owner in the business. Also I have proof of someone with a interest being cheated. So what is your suggestion? Do you believe the Trustee can be removed ? Thanks again Lee!

  43. Hi Lee, the more I read, the more confused I get. Please help.

    Our mom created a Revocable Trust which became Irrevocable upon death (8/2014).
    We rented the house for 2 yrs. putting that income into her savings/checking account
    within the trust. We have been filing a tax return yearly. No distributions to
    beneficiaries taken yet. Now house has sold (12/2017) with that money deposited into the savings acct. Here’s my ??

    Is once money/property put into the trust not considered inheritance?

    I have read:
    – Estate Distribution that a Beneficiary receives is inherited Tax-Free.
    – Distributions to Beneficiaries IS Taxable ONLY on the earnings of inherited assets.
    – Any Gains from sale of home ARE Taxable.
    – Inheritance is NOT considered income for Fed. Tax.

    Now that the house has sold, we will take distributions this year(2018).

    I’m confused as to if we will have to pay taxes on those dist. if it is money inherited from our mom?

    Can you explain please? Thank you!

    • Barb,
      You are correct that inheritance is not taxed as income. However, any income generated after your mother passed away is income that is taxable and someone has to pay the tax. For the sale of the home you will have income equal to the difference in the value of the home when you mother passed away and the price you sold it at. That increase in value since your mother passed away is taxable income and is not an inheritance. The inheritance was the value of the home when she passed away.

  44. Hi Lee:

    I wish we had known the trust tax rates before meeting with an elder law attorney who prepared two irrevocable trusts for my mother and stepfather. My questions for irrevocable trusts are in addition to the 40% tax rate over $12,700, it looks like there is no step-up in basis for beneficiaries if the residence is in an irrevocable trust, and there is no $250,000 exemption for selling the house when they have lived in the house 2 of the last 5 years when the house is in an irrevocable trust. Is this correct? If so, can the administrator of the irrevocable trust sell the assets back to the owner for less than the fair market value under Utah law? If not, have you decanted any irrevocable trusts, and if so, how much do you charge to do this?

    • It depends on what is in the Irrevocable trust. A irrevocable trust can be written in a way that would still qualify for a step-up in basis and the personal residence exemption. The attorney who wrote the trust should have educated the family about if this trust will or will not be eligible for these tax benefits.

    • It depends on the type of irrevocable trust that you got. Some Irrevocable trusts can still qualify for step-up in basis and the $250,000 personal residence exemption. If you want to undo the trust you have to get the approval of the trustees and all beneficiaries and go to court to get it undone, unless there is a special provision within the trust on how to undo the trust.

  45. Also what about gift taxes?

  46. Hi Lee,

    “The assignment of income from the trust to the beneficiaries is done with a K-1. The money can stay in the trust but you assign the income using a K-1. The beneficiaries will need the option to remove the income they are assigned from the trust but don’t have too.”

    Could you point to any authoritative guidance on this? (IRC, IRS publications, etc,). I have been looking for information to support the statement above for some time but have not been able to find anything.


  47. Hi Lee,

    My sister and I are the beneficiaries of our mom’s Revocable Trust. She passed away in February of this year in which the Trust became an Irrevocable Trust with new EIN. My sister and I have a Revocable Trust together – no assets in it yet. We are going to put our inheritance from our mom into our trust. In order to divide the taxes 50/50, would you advise us to get a separate EIN instead of using one of our SS#s? And if so, then we would have to file an informational 1041 along with K-1s(or some other form). Is there a simpler way to allocate the taxes?
    Thanks in advance

    • Beth,
      If the brother and sister trust is a grantor trust (revocable), use the SS number and whichever beneficiary is designated to receive a distribution from the trust will pay tax on that distribution. It seems odd to have siblings have a trust together.

  48. Hi Lee,
    We have a $46000 rental property owned by a complex Dynasty Trust, which was $10000 when brought.

    We want to sell will it taxed at 23.8% for the real estate capital gains tax ? What is the rate if we retain the money inside the Trust ?


    • Alex,
      The capital gain tax rates for trusts and estates are as follows:
      Estates and Trusts Taxable Income
      $ 0 to 2,600 maximum rate = 0%
      2,601 to 12,700 maximum rate = 15%
      12,701 and over maximum rate = 20%

  49. Alex,
    The capital gain tax rates for trusts and estates are as follows:

    Estates and Trusts Taxable Income
    $ 0 to 2,600 maximum rate = 0%
    2,601 to 12,700 maximum rate = 15%
    12,701 and over maximum rate = 20%

  50. Do you have any recommendations with money left in trust which is 50,000 how it could not be taxed? If I distribute it before 2018 I won’t have any money to pay the bills on the house in 2019. Is there any legal way that we can get away with not paying 47% on the $50,000 still ine acct?

    • Patricia,
      Is this $50,000 in income this year? (Interest, dividends, etc.) If the money is trust money that was in the trust before the trustor died or left over from last year, etc., it is not taxable, in that it is not an increase in the trust funds in 2018. Thus, there is no tax on it. Just because money is in a trust doesn’t mean it is taxed. It is only the increase in a year that is taxed in that year.

  51. Hi Lee. A completed gift trust was created with my parents’ savings in 2018. I am both the trustee and one of the beneficiaries.

    No distributions have been made from the trust. It earned about $40 of interest in 2018. If I understand correctly, even though it is a such small amount, this interest is taxable and I need to file. The trust does not have its own tax ID.

    Are my steps to obtain a tax ID, and then file a 1041 on the interest?

    Thanks, and thanks for all the valuable knowledge sharing on this page.

  52. If I name my Trust as beneficiary of my IRA account when I pass away, how many years can it be hold in that account?

    Other questions:

    1.- At what tax Mrate my Guardian ( Banking Institution) will tax the minimum required distribution (MRD)?
    2.- Will my Trust beneficiaries have to pay taxes when they receive their share from the Trust?
    3.- Is it normal that Guardians accept to keep Trusts as the owners of IRA accounts?

    • Maria,
      Because the trust doesn’t have a “life,” the money has to be taken out of the IRA within five years. If a person is named as the beneficiary, the IRA can be “stretched” over their life. The tax free or deferred growth an IRA offers is huge if a child will leave the money in the IRA for their lifetime.

    • Maria,
      In response to your other questions,
      It depends on the trust. If the trust qualifies as a IRS look-through trust then it can continue to hold the IRA during the beneficiaries life. If it is not a look-through trust then the trust has 5 years to remove the funds from the IRA. MRD being distributed to a trust is taxed at trust tax rates unless the MRD is distributed to the beneficiaries. If the MRD is passed on to the beneficiaries then the beneficiaries pay the tax instead of the trust.

  53. Hi Lee,

    My friend invests in mobile homes. He says he puts each home into its own individual trust. He sometimes owns the land which the home sits on and each lot of land is in its own individual trust too.

    My friend makes a ton of combined profit from all of his land and mobile home rentals, yet he says he only pays 11% (or some super low number) in federal income tax every year.

    Do his story sound like he is full of bologna?

    Thank you for your time.

    • Joey,
      His story sounds correct but it isn’t because of the trusts. The trusts that he is using are revocable trusts and do not pay taxes. Instead, he pays the taxes individually on the money earned at his own rate. His rate is so low because he is depreciating the property and getting a big loss from it that erases most of his income from the property. Real Estate is a big tax shelter.

  54. Quick question… Say you set up an Irrevocable trust with real estate that provides say 100k a year income. As you say you do not keep the money in there internally you distribute all income of 100k what type of tax rate do you have ? Also with real estate you have property tax expenses HOA dues etc do those factor in?

    • The trust has a horrid tax rate, that’s why you pay it all out to yourself using a K1. The tax rate will be whatever tax rate you are in when you add the trust income to your other income.

  55. You give the lay person the impression that their are ONLY two kinds of Trusts . I’m not an attorney (thank god) , but I’m aware of at least 150 types of Trusts . Would you kindly describe the 508c1A Trust to your audience which is LEGALLY a tax-exempt Trust and can be used by ANYONE , rich OR poor ?

    • Bob,
      It is either a revocable or irrevocable trust. Those are the two types of trusts. There are hundreds of revocable and irrevocable trusts that perform different functions depending upon which specific rules they follow. The IRS taxes the two types differently. The law treats the two types differently. Depending on how the trust it written, it will get a different tax and legal result.
      The 508 is generally a trust used in relation to benefit plans. I don’t specifically know what a 508c1A trust is or how it is supposed to be used.

  56. Dear Mr. Phillips,
    I read your articles with interest that are written in a simple and lucid language. Thank you.

    We live in PA. Are you allowed to Practice in PA?
    What is the impact of the Secure Act on IRA or IRA Trust?

    Jay Shah

    • Jay,
      I can’t practice in PA. PA has weird laws, and I’m not sure if I could practice there even if I lived there. Actually, I guess all attorneys in PA are practicing. Nobody ever gets good at PA law. 🙂
      The Secure Act is the same in every state, because it is Federal law. The biggest effect of the Secure Act is to eliminate the “stretch IRA” concept.

  57. Mr. Phillips: I need some help with a question. I am the trustee for two irrevocable, complex trusts. I am the beneficiary for one of them; my daughter is the beneficiary to the other. I know that tax free income from assets like munis can be kept within the trust with no tax liability. I know that taxable dividends and interest should be distribute to the beneficiary to optimize tax liabilities. But I am confused as to what to do with capital gains (both short term and long term). My CPA keeps giving me cryptic answers about leaving the capital gains in the trust and truing everything up when the trust terminates. What does this mean? What happens to any tax liability if I leave all the capital gains in the trust? Can you please clarify this for me?

  58. A 1041 complex trust had capital and ordinary gains from brokerage – No distribution was taken by beneficiary. Do I understand you to say we can put that on the k-1 with her paying the tax and it would be considered as a distribution? The fiduciary fee reduced this in the end prorating the taxable portion.

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