Capital Gains Inside Trusts

If you have a trust in Atlanta, Georgia, you may be wondering how capital gains taxes work inside it. It’s a fair question, and the answer matters a lot for your family’s financial future. Capital gains inside trusts can be taxed at some of the highest rates in the federal tax code, and the rules around basis, distributions, and trust structure all play a role. At Slowik Estate Planning, located in Atlanta, Georgia, we help clients understand these rules and build plans that protect their wealth for the next generation.

Table of Contents

• How Capital Gains Are Taxed Inside a Trust
• Grantor Trusts vs. Non-Grantor Trusts: Who Pays the Tax?
• The Step-Up in Basis Problem with Irrevocable Trusts
• Georgia’s Revised Trust Code and Capital Gains Planning
• Strategies to Manage Capital Gains Inside Trusts in Atlanta
• FAQs About Capital Gains Inside Trusts in Atlanta, Georgia

How Capital Gains Are Taxed Inside a Trust

Trusts are not taxed the same way individuals are. The federal tax code treats trusts as separate taxpayers, but the income brackets are much narrower. That means a trust can hit the top tax rate with far less income than an individual would need.

Income tax rates for trusts and estates are the same as for individual taxpayers, but the taxable income brackets are narrower. As a result, trusts and estates reach the highest rate with a much smaller amount of taxable income than individuals do. To put that in plain terms, the 37% top marginal tax rate for single filers begins after $626,350 of ordinary income, while a trust or estate is subject to that rate after reaching only $15,650 of income for 2025.

Long-term capital gains inside trusts follow the same logic. For 2025, the top 20% long-term capital gains rate doesn’t kick in for single filers until their taxable income exceeds $533,400, but that rate applies to trusts and estates with adjusted capital gains above $15,900 for 2025. The 20% maximum capital gains rate applies to estates and trusts with income above $15,900, while the 0% and 15% rates apply to certain lower threshold amounts, with the 0% rate applying to amounts up to $3,250.

Short-term capital gains work differently. Capital gains taxes are assessed either short- or long-term. Short-term capital gains are from assets held 12 months or less and are taxed according to the ordinary income tax rates. So if a trust sells a stock it held for only eight months, that gain is taxed as ordinary income, not at the lower long-term rate.

This compressed tax structure is one of the most important things to understand about trusts. Without proper planning, a trust can owe a large tax bill on gains that an individual taxpayer might pay at a much lower rate. That’s why working with an attorney who understands trust taxation matters so much. The team at Slowik Estate Planning is ready to help you think through these issues before they become costly surprises.

Grantor Trusts vs. Non-Grantor Trusts: Who Pays the Tax?

One of the first things to sort out is whether your trust is a grantor trust or a non-grantor trust. The answer determines who pays the capital gains tax, and it has a major effect on your overall tax picture.

A grantor trust is one where the person who created the trust (the grantor) is still treated as the owner for income tax purposes. Under Internal Revenue Code Section 671, when a grantor or another person is treated as the owner of a portion of a trust, the taxable income and credits of that portion are included in the grantor’s personal tax return. That means any capital gains the trust earns are reported on the grantor’s individual return, not on a separate trust tax return. For many families, this is actually a planning advantage. The grantor’s individual income brackets are much wider than a trust’s, so the capital gains may be taxed at a lower rate.

A non-grantor trust, by contrast, is its own taxpayer. It files its own return on IRS Form 1041 and pays taxes on income it retains. Many beneficiaries will be taxed at lower rates than the trust itself, meaning distributing income or capital gains to beneficiaries can help minimize the trust’s overall tax bill. This is a key planning strategy for non-grantor trusts. If the trustee can distribute capital gains to trust beneficiaries who are in lower tax brackets, the family as a whole may pay less in taxes.

Georgia follows federal income tax treatment for trusts in many respects. Unlike the federal government, Georgia makes no distinction between short-term and long-term capital gains, or even between capital gains and ordinary income. Instead, it taxes all capital gains as ordinary income, using the same rates and brackets as the regular state income tax, which is a fixed rate of 5.39%. This flat rate applies on top of whatever federal tax the trust owes, so the combined burden can be significant.

Understanding whether your trust is a grantor trust or a non-grantor trust is step one in any capital gains planning conversation. If you’re not sure which type you have, we encourage you to reach out to Slowik Estate Planning for a review.

The Step-Up in Basis Problem with Irrevocable Trusts

Here is one of the most misunderstood issues in trust planning, and it’s one that can cost families a lot of money. Many people assume that when a loved one dies, all the assets in their trust automatically get a step-up in basis. That is not always true.

Under IRC Section 1014(a)(1), property that passes from a decedent generally receives a new basis equal to the fair market value at the date of death. This “step-up” can erase years of built-up capital gains. Georgia’s inheritance benefits include a “stepped-up basis” for inherited property, which can reduce the capital gains tax heirs might face upon sale. This step-up resets the property’s value to the market rate at the time it is inherited, meaning any future capital gains tax would only apply to growth from that new value.

But here’s the problem. Rev. Rul. 2023-2 clarified that assets held in an irrevocable grantor trust do not automatically receive a step-up in basis at the grantor’s death. The IRS ruled that for property to receive a basis adjustment under Section 1014(a), the property must be “acquired or passed from a decedent” under one of the seven categories listed in Section 1014(b). If a grantor funds an irrevocable trust with a completed gift, and the trust assets are not included in the grantor’s gross estate for estate tax purposes, those assets do not qualify for a step-up. The basis immediately after the grantor’s death is the same as it was immediately before death.

What does that mean in practice? Say a grantor transferred stock worth $200,000 into an irrevocable trust years ago when it had a basis of $50,000. By the time the grantor dies, that stock is worth $800,000. Without a step-up, the trust still has a $50,000 basis. If the trustee sells it, the trust owes capital gains tax on $750,000 of gain. With a step-up, the basis would reset to $800,000, and there would be no gain at all. The difference in tax owed can be enormous.

This is a critical planning issue for Atlanta families using irrevocable trusts. The attorneys at Slowik Estate Planning can help you review your trust structure to understand how this ruling affects you.

Georgia’s Revised Trust Code and Capital Gains Planning

Georgia’s trust law is governed by the Revised Georgia Trust Code, found in O.C.G.A. Title 53, Chapter 12. This law sets the rules for how trusts are created, administered, and terminated in Georgia. It also gives trustees important powers that can affect capital gains planning.

Under Article 11 of the Revised Georgia Trust Code (O.C.G.A. §§ 53-12-200 through 53-12-221), trustees have a duty to administer the trust in the best interests of the beneficiaries. This includes managing trust investments with an eye toward tax efficiency. A trustee who ignores the capital gains tax consequences of selling trust assets may be failing this duty.

Article 16 of the Trust Code (O.C.G.A. §§ 53-12-340 through 53-12-364) covers trust investments and requires trustees to act as a prudent investor would. That standard includes thinking about after-tax returns, not just gross returns. A trustee who sells appreciated assets without considering the tax impact may not be meeting this standard.

Article 13 of the Trust Code (O.C.G.A. §§ 53-12-240 through 53-12-292) governs trust administration more broadly, including how income and principal are allocated. The Georgia Principal and Income Act, found in Article 17 (O.C.G.A. §§ 53-12-380 through 53-12-455), determines what counts as income versus principal in a trust. Capital gains are generally allocated to principal, not income. This matters because it affects whether a trustee can distribute gains to beneficiaries as part of regular income distributions.

Proper trust administration in Georgia requires a trustee to understand these rules and apply them correctly. If you are a trustee managing a trust with appreciated assets, you need to know how Georgia law governs your decisions. Slowik Estate Planning helps trustees in Atlanta understand their responsibilities and make smart decisions about capital gains.

Strategies to Manage Capital Gains Inside Trusts in Atlanta

Now that you understand the problem, let’s talk about solutions. There are several strategies that can reduce or manage capital gains taxes inside trusts. None of them are one-size-fits-all, and each depends on your specific trust structure, your goals, and the assets involved.

One common approach is distributing capital gains to beneficiaries who are in lower tax brackets. Many beneficiaries will be taxed at lower rates than the trust, and distributing income or capital gains to such beneficiaries can help minimize the trust’s overall tax bill. This works best when the trust document gives the trustee discretion to distribute principal, and when the beneficiaries have lower taxable income than the trust would otherwise face.

Another option is using a Charitable Remainder Trust, or CRT. You can defer capital gains by moving appreciated assets into a Charitable Remainder Trust before you sell. A CRT is a type of trust that benefits both an individual and a charity. The individual receives distributions each year for a specified term, and the charity receives a lump sum at the end. The trust itself is tax exempt, so assets sold inside of it do not trigger any immediate capital gains tax. This is a powerful tool for people who want to sell highly appreciated assets while also supporting a charitable cause.

Careful drafting of wills and trust documents is another important tool. How a trust is drafted can determine whether assets are included in the gross estate (and thus eligible for a step-up in basis) or excluded. Including certain powers in a trust document can allow assets to qualify for a step-up while still achieving asset protection or estate tax goals.

For families with pets and complex estate plans, even unique arrangements like pet guardianships involve trust structures that can hold assets subject to capital gains rules. Any trust that holds appreciated property needs to be reviewed with these tax issues in mind.

The right strategy depends on your situation. Slowik Estate Planning works with Atlanta families to review existing trusts, identify capital gains exposure, and recommend practical steps to reduce taxes. Every plan is different, and past results in any client matter do not guarantee the same outcome in your case. We encourage you to contact us for a personalized review of your estate plan.

FAQs About Capital Gains Inside Trusts in Atlanta, Georgia

Does a trust pay capital gains taxes in Georgia?

Yes. A non-grantor trust pays its own taxes, including capital gains taxes. At the federal level, trusts reach the highest capital gains rate of 20% once their income exceeds $15,900 (for 2025). Georgia taxes all capital gains as ordinary income at a flat state rate, which is currently 5.39% for the 2025 tax year. A grantor trust, on the other hand, passes its income and capital gains through to the grantor’s personal tax return, which may result in a lower overall rate depending on the grantor’s income level.

Do assets in an irrevocable trust get a step-up in basis when the grantor dies?

Not always. Under IRS Rev. Rul. 2023-2, assets held in an irrevocable grantor trust that are not included in the grantor’s gross estate do not receive a step-up in basis at death under IRC Section 1014. This means the trust keeps the original cost basis of the assets, and capital gains taxes will apply to all appreciation when those assets are eventually sold. This is a critical issue for anyone with an irrevocable trust holding appreciated property, and it’s worth reviewing your trust documents with an attorney.

Can a trustee distribute capital gains to beneficiaries to reduce taxes?

In some cases, yes. If the trust document gives the trustee discretion to distribute principal, and if the trust’s accounting rules allow capital gains to be treated as distributable income, the trustee may be able to shift gains to beneficiaries who are in lower tax brackets. This can reduce the overall tax paid by the family. However, not every trust document allows this, and Georgia’s Principal and Income Act under O.C.G.A. §§ 53-12-380 through 53-12-455 governs how income and principal are allocated. A trustee should consult with a qualified attorney before making these decisions.

What is the difference between a grantor trust and a non-grantor trust for capital gains purposes?

A grantor trust is one where the person who created the trust is treated as the owner for income tax purposes under IRC Section 671. All income and capital gains are reported on the grantor’s personal tax return. A non-grantor trust is its own taxpayer and files its own return on IRS Form 1041. Capital gains retained by a non-grantor trust are taxed at the trust’s compressed brackets, which reach the top 20% rate at just $15,900 of income for 2025. The type of trust you have has a major impact on how capital gains are taxed, so it’s important to know which one you’re dealing with.

How can Slowik Estate Planning help me with capital gains inside my trust?

Slowik Estate Planning, located in Atlanta, Georgia, helps clients review their existing trust documents, understand how capital gains are taxed under both federal and Georgia law, and identify planning strategies to reduce tax exposure. This may include reviewing whether your trust qualifies for a step-up in basis, evaluating whether distributions to beneficiaries could reduce the trust’s tax burden, or discussing whether your trust structure still meets your goals in light of current law. To schedule a consultation, reach out to Slowik Estate Planning directly. Every situation is different, and nothing on this page should be taken as legal advice for your specific circumstances. Prior results in any client matter do not guarantee a similar outcome in your case.

More Resources About Trust Taxation Basics

• How Trusts Are Taxed
• Grantor Trusts vs Non Grantor Trusts
• Trust Tax Filings
• Step Up in Basis and Trusts
• Georgia State Tax Considerations for Trusts