Trust Taxation

Trusts pay taxes just like people do. But how a trust is taxed depends on what type of trust it is and how it handles its income. Here is a simple guide to understanding how trust taxes work.

Grantor Trusts

A grantor trust is one where the person who created the trust (the grantor) still controls it and benefits from it. For tax purposes, the IRS treats the trust's income as the grantor's personal income. The grantor reports the trust's income on their own personal tax return.

This is common with revocable living trusts. Because the grantor can change the trust at any time and still uses the assets, the trust is "invisible" for tax purposes. The grantor simply includes the trust's income on their own Form 1040.

Key point: A grantor trust does not file its own tax return. The grantor handles everything on their personal return.

Complex Trusts (Non-Grantor Trusts)

A complex trust is one that is not a grantor trust. This includes most irrevocable trusts. A complex trust must file its own tax return using Form 1041 (U.S. Income Tax Return for Estates and Trusts).

Complex trusts are taxed differently depending on whether they distribute income to beneficiaries:

• Income distributed to beneficiaries - The trust deducts the distributed amount, and the beneficiaries pay tax on it on their personal returns.
• Income kept in the trust - The trust pays tax on any income it keeps.
• Undistributed income - If the trust earns income but does not distribute it, the trust pays the tax on that income.

Key point: Complex trusts reach the highest tax bracket at much lower income levels than individuals. For 2025, a complex trust hits the top federal tax rate at approximately $15,200 of taxable income, compared to over $600,000 for individual filers.

Why Tax ID (EIN) Matters

A trust that is not a grantor trust needs its own Employer Identification Number (EIN), which is like a Social Security number for the trust. The EIN is used to:

• Open bank accounts in the trust's name
• File the trust's tax return
• Report income and distributions to the IRS
• Identify the trust for financial transactions

TrustForge supports both EIN and SSN (Social Security Number) as tax identifiers. You can enter your trust's tax ID directly in the app's settings.

Filing Requirements

The basic filing rules are:

• Grantor trusts - No separate tax return needed. The grantor reports all income on their personal return.
• Complex trusts - Must file Form 1041 every year if the trust has income of $600 or more, or if any beneficiary is a nonresident alien.
• Simple trusts - A simple trust must distribute all its income currently and cannot make charitable distributions. These trusts also file Form 1041 but are taxed differently.

Each trust type has its own rules, and tax laws change regularly. It is important to work with a tax professional who understands trust taxation.

Different Trust Types, Different Tax Treatment

Not all trusts are taxed the same way:

• Revocable living trusts are usually grantor trusts, so the grantor pays the taxes personally.
• Irrevocable trusts are usually complex trusts and file their own returns.
• Charitable trusts may receive special tax treatment depending on their structure.
• Special needs trusts have their own tax rules depending on whether they are grantor or non-grantor trusts.

The type of trust you choose affects how income, deductions, and distributions are handled for tax purposes.