Trust Tax Rates & Deductions in 2025

Theresa de Leon, EVP, National Director of Sales at Arden Trust

A trust is an excellent financial instrument for estate planning and ensuring your assets go where you want them to at the end of your life. Irrevocable trusts can also be a good way to lower your taxable income and protect assets from creditors. However, that doesn't mean that they are completely tax-free.

Trusts are often taxed, as is the income received from them by beneficiaries. Trust taxation is complex, and there's a lot to know about trust estate and tax planning. It's a good idea to hire a tax professional or financial advisor to help you understand exactly how your trusts are taxed, but to give you a general idea, we explore trust tax rates here.

Do Trusts Pay Taxes?

A trust is a legal entity that holds money and assets for future distribution or management on behalf of beneficiaries. The person who establishes the trust is called the grantor, and the person designated to manage the trust is called the trustee. There are three primary types of trusts, each with different tax implications:

• Simple trust: The most common and basic type of trust holds assets and distributes all of the income earned from those assets to the trust's beneficiaries. But it does not distribute any of its principal.
• Complex trust: A trust is considered complex if it distributes less than all of its earned income in a year, if it makes distributions to charities in addition to named beneficiaries, or if it distributes any of its principal.
• Grantor trust: This trust is managed by the person who created it, giving them significant control over the trust's assets.

In each case, trusts pay federal, state, and applicable local taxes. With a grantor trust, the grantor is responsible for paying all taxes on the trust's funds. Non-grantor trusts, like simple and complex trusts, must directly pay taxes on all income, assets, and tax events. That means that the trustee must file a tax return for the trust using IRS Form 1041 and relevant state forms if the trust has any taxable income or gross income of $600 or more. 

For grantor trusts, the grantor may elect to use their own Social Security number and include the trust on their personal income tax return. If they obtain a taxpayer identification number for the trust, they must file a separate return.

Trusts may be liable for income tax, capital gains tax, gift tax, estate tax, and property tax. Here, we'll only focus on the federal trust tax rate and deductions, but you should consult a tax professional or financial advisor to ensure you understand the regulations for your state or local municipality.

How Is a Trust Taxed?

The IRS generally classifies trust assets as either principal or income. The assets owned by the trust are typically considered principal (like stocks, bonds, and real estate), while the money earned or produced by those assets is income (like dividends, interest, or rent). That's about as simple as it gets, as there are complex accounting rules that dictate how to treat a trust's income, expenses, taxes, and distributions.

Tax rules depend on whether a trust is a grantor or non-grantor trust and whether it is a revocable or irrevocable trust. 

• A revocable living trust allows the grantor to transfer assets into the trust while maintaining control over and access to those assets. The grantor may make changes to the trust in their lifetime. 
• An irrevocable trust may not be changed or terminated without the approval of the grantor and all beneficiaries, but it may have additional tax benefits. 

Let's explore some of the key taxation differences between revocable and irrevocable trusts.

Tax Treatment of a Revocable Trust

From an income tax standpoint, revocable trusts are relatively straightforward. During the trust's lifetime, any income generated by a revocable trust is taxable to the grantor. Since the grantor retains control over the assets, usually all items of income, deduction, and credit will be reported on the grantor's personal income tax return. 

Revocable trusts may be considered either simple or complex. With a simple non-grantor trust, the beneficiaries may pay income taxes on income generated by trust assets, while the trust itself must pay capital gains taxes. With a complex non-grantor trust, taxes may be owed by the beneficiaries, the trust itself, or a combination of both, depending on the principal and income generation circumstances.

Tax Treatment of an Irrevocable Trust

Irrevocable trusts generally have their own tax identification numbers since assets moved into these trusts are no longer formally owned by the grantor. In these cases, the trustee files a tax return on behalf of the trust as if it were an individual. However, that's not always the case. Taxation depends on whether an irrevocable trust is a grantor or non-grantor trust.

With a grantor trust, all income, deductions, and credits are not taxed at the trust level but are reported on the grantor's personal income tax return. With non-grantor irrevocable trusts, it begins to get tricky. As we noted before, the trust is taxed as its own individual entity.

Non-grantor trusts may earn deductions if the trust pays expenditures on behalf of the trust's beneficiaries, which will mean that all or a portion of the trust's income is taxable to the beneficiary. This can often be a positive outcome for families since trust tax rates are much higher than individual ones, so a beneficiary is likely in a lower tax bracket and, therefore, less of the income is taxable. Trust income that is not distributed or expended on behalf of beneficiaries in a given year is typically taxed to the trust.

Tax Rates on Trusts: Current Brackets

Trust tax rates tend to be higher than individual tax rates, so it's important to understand tax brackets to determine how certain types of trusts may be taxed. Trusts and individuals have the same maximum trust rates, but trusts tend to be taxed more aggressively.

For instance, the top marginal tax rate for a single flier (37%) begins after $626,350 of ordinary income. A trust, as we'll see in the examples below, reaches that threshold at just $15,650 of income. This incentivizes trusts to distribute funds to beneficiaries.

Trust Income Tax Rates

The 2025 income tax rates (which are filed in 2026) are broken down into four levels for trusts. All income generated by estates is also subject to these tax brackets. These are the 2025 trust tax rates and brackets:

• $0 – $3,150: 10%

• $3,150 – $11,450: 24%

• $11,450 – $15,650: 35%

• $15,650+: 37%

It's important to note that the brackets have changed from the 2024 tax year, which were:

• $0 – $3,100: 10%

• $3,100 – $11,150: 24%

• $11,150 – $15,200: 35%

• $15,200+: 37%

These four tax brackets are all subject to standard rules. But note that taxes are only assessed on income, not on the principal value of the trust. So, if you earned a combined $11,000 on dividends and rental income, you would pay:

• 10% on all earnings up to $3,150: $315

• 24% on earnings from $3,150 to $11,000 ($7,850): $1,884

• Total tax due is $2,199

Remember, paying this income out to beneficiaries will make them subject to personal income tax rates, which are lower. This can ensure that more of your money goes to beneficiaries rather than the government.

Trust Capital Gains Tax Rates

Capital gains taxes are assessed either short- or long-term. Short-term capital gains are from assets held 12 months or less, including non-qualified dividends, and are taxed according to the income tax rates above. Qualified dividends and capital gains on assets held for longer than 12 months are taxed at the long-term capital gains rate, which is lower.

In 2025, there are three long-term capital gains brackets:

• $0 – $3,250: 0%

• $3,250 – $15,900: 15%

• $15,900+: 20%

Again, the brackets for 2025 are slightly higher than those of 2024, which were:

• $0 – $3,150: 0%

• $3,150 – $15,450: 15%

• $15,450+: 20%

Trusts typically generate the majority of their income through investments, but some may earn through real estate assets, too. Income generated by rents would be classified as ordinary income, not capital gains. Capital gains are only increases in the value of held assets like stocks and bonds. As an example, if you sold a few shares of Apple stock that you had been holding onto for years and earned a $15,000 gain, you would pay:

• $0 on the first $3,150 of earnings
• 15% on earnings from $3,150 to $15,450 ($12,300): $1,845
• The total tax due is $1,845

Note that the total tax due on a long-held asset is less than the income tax on a smaller amount of earnings.

Other Trust Tax Rates

Trusts can help reduce the impact of estate and gift taxes while moving money to designated beneficiaries, but they're still subject to some other taxes. For instance, grantors must still pay property taxes on real estate held in a revocable trust. Irevocable trusts must also pay property taxes on real estate, although they can deduct those property taxes from the trust's taxable income.

One important trust tax rate you should know is the net investment income tax (NIIT) for undistributed investment income. There is an additional 3.8% tax on the lesser of the trust's undistributed net investment income or the excess of adjusted gross income over $15,650. This further incentivizes you to distribute trust income to pass the tax liability onto beneficiaries at much lower rates.

4 Key Deductions in Trust Taxation

Like individuals, trusts are eligible for a range of tax deductions that can lower the taxable income of the trust. We break down some of these key deductions here.

Income distribution deductions

Trusts that distribute funds to beneficiaries may separate income into two segments: 

1. Income the trust keeps for itself
2. Income the trust distributes

The portion distributed is known as distributable net income (DNI). Trusts do not have to pay taxes on DNI in the same calendar year that it was earned because beneficiaries will pay taxes on that income instead. DNI is calculated as:

• DNI = Total Taxable Income – Total Capital Gains + Applicable Exemptions

Administrative expenses

The costs of maintaining and administering the trust are deductible at tax time. For instance, many grantors consider hiring a corporate trustee due to the complex nature of many trusts. You may write off the fees you pay this corporate manager, as well as tax preparation fees.

Charitable deductions

Any cash donations a trust makes to charity may be written off for the taxable year. This is nonrefundable, which means that a trust may not deduct more in donations than it earned in taxable income.

Other deductions

Finally, the most significant deduction you may be able to take is simply on contributions themselves. Contributions to a trust are generally not subject to income taxes since the person contributing it has already paid taxes on the money. Typically, trusts only pay taxes on income generated from money and assets it currently holds.

Beneficiaries usually pay taxes on distributions they earn, but they do not have to pay taxes on any distributions made from the trust's principal balance. Any money earned and distributed by the trust in the same year is not taxable.

In some cases, a beneficiary can still avoid paying taxes if they have received less from the trust than the lifetime gift tax exemption. In 2025, the gift exemption is $13.99 million for individuals and $27.98 million for couples. In 2024, they were $13.61 million and $27.22 million, respectively.

Understand Trust Taxability With Arden Trust

Trust taxation is notoriously complicated. Professional assistance can make your life easier, whether that's hiring a corporate trustee or consulting tax professionals and financial advisors to help you best allocate trust assets. 

When preparing a trust document, it's crucial to enlist the aid of an estate planning attorney and experienced trust experts. Contact Arden Trust today to discuss your estate plan and begin working on a trust plan that works for you and your family.