Income Tax Rates for Trusts

A trust or a decedent’s estate is a separate legal entity, which must file its own income tax returns and pay tax on any income it generates such as interest and dividend. There are some exceptions to this rule. A person who sets up a so called living trust, in which she controls the trust funds during her life time will treat the income as her own, and the trust will not have to pay separate income tax. After the settlor’s death though the trust will become irrevocable, and it will assume the role of a separate taxpayer filing returns and paying taxes on its annual income.

Many of the income tax rules that apply to individuals also apply to trusts and estates, but there are notable differences. One variation that can have a substantial affect is tax rates. A single individual will only pay the top 35% income tax rate on income over $373,650.00 a year. However, a trust or a decedent’s estate will pay the 35% rate on all of its income over $11,200.00 a year. Obviously you need to maximize the amount of income that is taxed to related individuals rather than to the estate or trust, and you should consult an estate planning  attorney who understands the tax implications of maintaining income producing property in the trust or estate.