Who Pays the Tax on Your Trust?

The kingdom with two taxes

An old kingdom taxed its farms twice. Every autumn there was a harvest tax on whatever the field produced, and once a generation there was a gate tax, due the day a farm passed through the gate to the children. Families learned a workaround: deed your field to a steward, and the farm never passes through the gate, so the gate tax never comes due. But the arrangement carried two costs. A steward's field paid the harvest tax at the crown's harshest rate on even a modest harvest. And when a farm did pass through the gate, the gatekeeper wiped the family's ledger clean, every old gain forgiven, while a steward's field never passed through, so nothing was ever forgiven. Then one year, the king raised the gate tax threshold so high that almost no farm would ever owe it again. A generation later, half the village was still deeded to stewards, mostly out of habit.

Every piece of that story maps to something real, though actual results always turn on the trust document, the assets, and current law. The harvest tax is the income tax your trust faces each year. The gate is what the law counts in someone's estate at death, and the gatekeeper's eraser is the basis step-up that generally wipes out old gains on assets the law still counts as yours (when values have fallen, the same rule can adjust basis down). The stewards are trusts. GRATs, SLATs, ILITs, and the rest of the alphabet soup are all just different flavors of steward, built for different jobs, but every one of them still has to answer one of two questions: who pays the harvest tax each year, and what happens at the gate?

And the king really did move the threshold, just over a year ago: the 2025 tax law set the federal exemption at $15 million per person starting in 2026, indexed for inflation afterward and with no scheduled sunset. That change is barely a year old, and plenty of families still run trusts built for the old number. One more thing the parable teaches that most families miss: the two taxes run on two separate switches, set independently. A trust can sit outside the estate while you keep paying its income tax out of your own pocket every year, and some trusts are designed to do exactly that. Setting one switch doesn't settle the other, which is why your trust deserves both questions, not one.

The harvest question

One note on perspective before the numbers. We'll say your trust as though you created it. If you're reading this as a beneficiary or a trustee instead, every question below still applies; your seat just changes whose return we're pointing at.

Start with the tax that arrives every year. When your trust earns income, that income lands on one of three tax returns: yours, the trust's own return, or a beneficiary's, and occasionally it splits across more than one. Most families who own a trust can't say which, and that's no criticism; trusts get created during busy, emotional seasons and then sit quietly for years. But the middle answer is surprisingly expensive. When a trust keeps its income rather than paying it out, the rates climb far faster than they do for a person. In 2026, a trust reaches the top federal ordinary bracket once its taxable income for the year passes just $16,000; a single filer doesn't reach that bracket until taxable income passes $640,600, and married couples higher still. Investment gains and qualified dividends follow their own rate schedules, but the pattern holds. The steward's field (trust) really does climb the crown's rate ladder faster than anyone else in the kingdom.

The release valve

The good news is that this is usually a decision, not a life sentence. When the trustee pays money out, the income generally travels with it, taxed at the recipient's own rate instead of the trust's. Each year, within whatever the document permits, the trustee's distribution decisions shape where the tax lands. Two things surprise people here. The labels in the document don't control the tax by themselves, so a payment the trust calls principal can still carry taxable income out with it. And the permission rules are separate from the tax rules: many trusts let the trustee pay for (HEMS) health, education, maintenance, and support, but that standard helps govern whether the check can be written, not who pays tax on it.

The gate question

The second question settles only once, at death, which is exactly why it deserves review during life. It's the quiet one from the parable. If your trust was built to keep assets outside the gate, it may also be giving up the gatekeeper's eraser, meaning your family inherits the old basis instead of a clean ledger/stepped up basis, and the built-up gain becomes taxable when they sell. Under the old thresholds, that trade-off often made real sense. However, under a $15 million exemption, many families may be paying for protection they no longer need, in the most expensive currency there is. Other families, above the threshold or in states with their own estate taxes, are still getting real value from the same structure. There's no single right answer here, and anyone who promises one is hiding an assumption. There's a trade-off, your family sits at a particular point on it, and the work is pricing your point.

Three steps to your answer

NOTE

Here's how to find out where your trust stands, with your advisor, your CPA, and your estate attorney beside you the whole way.

Find last year's trust tax paperwork. One of three things arrived: a Schedule K-1, a short tax information letter, or nothing at all. Whichever it was is a strong first clue rather than a conclusion, and nothing at all is its own important answer since it can mean an unfunded trust or a reporting gap that needs follow-up.

Bring your advisor three questions: Who paid tax on the trust's income last year? Did the trust keep income it could have paid out? And when did an attorney last read the document against current law?

Ask for a trust review. We'll read the document, work with your tax and estate attorneys to pin down who pays each year, and price the gate trade-off under today's rules in plain English, so nothing changes until everyone understands the trade-off.

In the parable, half the village stayed deeded to stewards long after the reason was gone, simply because nobody walked the fields. Your trust was built to take care of the people you love. Walking the field with you, and making sure the old trade-off still earns its keep, is part of taking care of it. We're glad to look together.

For complete list of disclosures, view Disclosures.