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Trust Tax Rates (Simple Trust or Complex Trust) Will Blow Your Mind

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 39.6% at only $12,150 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. (For details, see IRS Technical Advice Memo in addition to the table below.)

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

eliminating

If taxable income is: The tax is:
Not over $2,500 15% of the taxable income
Over $2,500 but not over $5,800 $375 plus 25% of the excess over $2,500
Over $5,800 but not over $8,900 $1,200 plus 28% of the excess over $5,800
Over $8,900 but not over $12,150 $2,068 plus 33% of the excess over $8,900
Over $12,150 $3,140.50 plus 39.6% of the excess over $12,150

Rev. Proc. 2013-15 of the American Taxpayer Relief Act set the tax rates for 2013.  These rates apply to estates and trusts. The Obama-care tax on investment income of 3.8% started in 2013 and applies to trust income above the $12,150 level. These rates are inflation-adjusted each year, so note that the rates in the table above are for 2014 and check for the year you are interested in.

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

Note: This post was updated on January 29, 2015.

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16 Comments
  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

  2. 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.

  3. 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.

  4. 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.

  5. 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

  6. 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.

  7. 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.

  8. 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.

  9. 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

  10. 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.

  11. 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?

  12. Stephen,

    Unfortunately, this would have to do with international tax treaties, which is not an area we work in or know much about.

  13. 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!

  14. 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

  15. 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).

  16. 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.

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