How Trusts Are Taxed

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If you have a trust in Atlanta, Georgia, understanding how it gets taxed can save your family a lot of money. Trust taxation is not the same as personal income taxation. The rules are different, the rates are different, and the consequences of getting it wrong can be costly. At Slowik Estate Planning, located in Atlanta, Georgia, we help families understand exactly how their trusts work under both federal law and Georgia law. This page breaks down the key tax rules you need to know in plain, straightforward language.

Table of Contents

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

The first thing you need to understand is who actually owes the tax on trust income. That answer depends on what type of trust you have. The IRS draws a clear line between grantor trusts and non-grantor trusts, and the difference has a major impact on your tax bill.

For income tax purposes, a trust is treated either as a grantor or a non-grantor trust. In the case of a grantor trust, the grantor, meaning the person who created the trust, is responsible for paying the tax on income generated by trust assets. Think of it this way: if you set up a revocable living trust and you still control it, the IRS treats you as the owner. The trust’s income shows up on your personal tax return, not a separate trust return.

A non-grantor trust is a separate taxable entity. It must generally file its own tax return, known as Form 1041, if it has any taxable income or if its gross income for the year is $600 or more. These trusts are responsible for paying their own taxes on any income they do not distribute.

Under Section 671 of the Internal Revenue Code, where the grantor is treated as the owner of any portion of a trust, the taxable income and credits of the grantor include those items attributable to that portion of the trust. That means a grantor trust is essentially transparent for federal income tax purposes. The trust itself pays no separate tax.

Non-grantor trusts reach the highest tax rates at much lower income levels than individual taxpayers do. This compressed schedule is designed to prevent people from using trusts solely to avoid paying higher personal income taxes. This is a critical planning point. If your irrevocable trust retains income rather than distributing it, the trust could face the highest federal tax bracket very quickly. Working with an experienced Atlanta estate planning lawyer helps you understand which structure fits your goals and keeps your tax exposure manageable.

Federal Trust Tax Rates in 2026

Federal trust tax rates are compressed compared to individual rates. That word “compressed” matters a lot here. It means a trust hits the top tax bracket at a much lower income level than an individual does. For 2026, this difference is striking.

Consider that in the 2026 tax year, the top marginal tax rate for a single filer, 37%, begins after $640,600 of taxable income. A trust is subject to that rate after reaching only $16,000 of taxable income. That is a dramatic difference. An individual can earn over $640,000 before hitting the 37% bracket. A trust hits that same rate at just $16,000. This is why trust income tax planning matters so much.

For 2026 taxes, the federal government taxes trust income at four levels. These tax brackets also apply to all income generated by estates. The four brackets are 10%, 24%, 35%, and 37%, and they compress into a very small income range for trusts.

Trusts may be required to make quarterly estimated tax payments throughout the year against any expected tax liability. For 2026, a trustee must make estimated payments if the trust will owe $1,000 or more in taxes, after subtracting withholding and credits. Trustees must file estimated taxes using IRS Form 1041-ES.

Capital gains tax applies when you sell investments for more than your basis, or what you paid for them. Short-term capital gains from assets held 12 months or less and non-qualified dividends are taxed according to the above income tax rates. However, qualified dividends and capital gains on assets held for more than 12 months are taxed at lower rates called the long-term capital gains rates.

Proper Estate Tax Planning in Atlanta Georgia accounts for these compressed brackets. Distributing income to beneficiaries who are in lower individual tax brackets can reduce the overall tax burden on the family. This is a strategy worth discussing with Slowik Estate Planning before you finalize your trust documents.

How Georgia Taxes Trust Income in 2026

Beyond federal taxes, Georgia has its own rules for taxing trust income. If your trust is administered in Georgia or has Georgia-source income, you need to understand how state tax applies. The good news is that Georgia’s tax structure is relatively straightforward compared to many other states.

Georgia will begin the year 2026 with an income tax rate of 5.19% for personal, corporate, and partnership income. Georgia applies this flat rate to trust income as well. Because Georgia employs a flat rate, there are no layered brackets such as 2%, 4%, or 6% tiers. So whether your trust earns $5,000 or $500,000 in Georgia-sourced income, the same 5.19% state rate applies at the trust level.

Georgia trust law is governed by the Revised Georgia Trust Code of 2010, codified at O.C.G.A. Title 53, Chapter 12. This code covers everything from how trusts are created and administered to how trustees must account for income and expenses. Under Article 13 of the Revised Georgia Trust Code (O.C.G.A. §§ 53-12-240 through 53-12-292), trustees have specific duties regarding the administration of trust assets, which directly affects how income is calculated and reported for tax purposes.

Georgia also follows the Georgia Principal and Income Act, found at Article 17 of the Revised Georgia Trust Code (O.C.G.A. §§ 53-12-380 through 53-12-455). This law determines what counts as “income” versus “principal” in a trust. That distinction matters for tax purposes because it affects what gets taxed at the trust level versus what passes to beneficiaries.

For trusts with assets or beneficiaries in multiple countries, the tax picture becomes more complicated. International Estate Planning adds layers of federal and potentially foreign tax rules that require careful attention. Slowik Estate Planning works with clients who have cross-border estate planning needs and can help you think through how Georgia and federal rules interact with your global assets.

How Irrevocable Trusts Are Taxed and the Step-Up in Basis Issue

Irrevocable trusts come with real tax trade-offs. You give up control of the assets, and in exchange, you may get estate tax benefits and asset protection. But the tax rules for irrevocable trusts require careful planning, especially when it comes to capital gains and what is known as the “step-up in basis.”

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.

One major issue with irrevocable grantor trusts involves a 2023 IRS ruling that still applies today. Under Rev. Rul. 2023-2, the IRS clarified that assets held in an irrevocable trust do not automatically receive a step-up in basis at the grantor’s death if those assets are not included in the grantor’s taxable estate. Under IRC Section 1014(a)(1), the basis of property acquired from a decedent is generally adjusted to fair market value at the date of death. However, that step-up only applies to property that qualifies under the seven categories listed in Section 1014(b).

The ruling makes clear that 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 receive a basis adjustment at death. The basis of the asset immediately after the grantor’s death remains the same as it was immediately before death. This means beneficiaries who later sell those assets could face significant capital gains taxes on appreciation that built up over many years.

This is a real planning issue. An Asset Protection Lawyer at Slowik Estate Planning can help you weigh the estate tax savings of an irrevocable trust against the potential capital gains tax cost of losing the step-up in basis. Getting this balance right requires a careful look at your specific assets and family goals.

Trust Distributions and Beneficiary Taxation

When a trust distributes income to beneficiaries, the tax picture shifts. Instead of the trust paying tax at the compressed trust rates, the income passes to the beneficiary, who pays tax at their own personal rate. This can result in significant tax savings for the family as a whole.

Whether the trust or the beneficiary pays the tax usually depends on whether the income is kept in the trust or given out to the people named in the trust documents. A trustee who understands this rule can time distributions strategically to minimize the overall family tax burden.

Whenever an asset is passed from a trust to a beneficiary, it is called a distribution. Whether or not the distribution is taxable depends on the type of trust and the type of distribution. If it comes from the principal amount, it is typically not taxed. If it comes from any income generated through the trust, it is taxed as income.

To ensure the IRS knows who is responsible for the tax, the trust provides each beneficiary with a Schedule K-1. This form shows the beneficiary’s share of the trust’s income and other tax items, which they must then report on their own federal tax returns.

For non-grantor trusts, trusts required to distribute all of their income currently may claim a $300 exemption. Most other trusts are allowed a $100 exemption. These small exemptions highlight why distribution planning is so important. The trust deducts what it distributes, and beneficiaries pick up that income on their own returns at their personal rates.

Proper trust administration is essential to getting distributions right. A trustee who fails to follow the trust document’s terms or misreports distributions can create tax problems for both the trust and the beneficiaries. Slowik Estate Planning helps trustees in Atlanta and throughout Georgia understand their duties and stay compliant with both federal and state tax rules.

Wills vs. Trusts: Tax Considerations When Choosing Your Plan

Many Atlanta families wonder whether a will or a trust is the better choice for their estate plan. From a tax standpoint, the two tools work very differently. Understanding those differences helps you make a smarter decision for your family.

A will transfers assets through the probate process. Assets that pass through probate are generally included in the decedent’s gross estate for estate tax purposes. Under current federal law, the estate tax exemption was made permanent by the One Big Beautiful Bill Act passed in July 2025, and the exemption was raised to $15 million per person beginning in 2026, adjusted for inflation moving forward. For most Georgia families, the federal estate tax is not a concern at current exemption levels. But for high-net-worth families, it absolutely is.

A revocable living trust does not reduce your taxable estate because you still control the assets. However, it avoids probate, which saves time and money. An irrevocable trust, on the other hand, can remove assets from your taxable estate if structured correctly, which may reduce estate tax exposure for larger estates.

From an income tax standpoint, assets that pass through a will and are included in the gross estate generally receive a step-up in basis under IRC Section 1014(a)(1). That means your heirs inherit assets at their current fair market value, wiping out capital gains that built up during your lifetime. Assets in a properly structured irrevocable trust, as discussed above under Rev. Rul. 2023-2, may not receive this same step-up if they are not included in your taxable estate.

Reviewing your wills and trust documents together is the best way to make sure your estate plan is tax-efficient. Slowik Estate Planning, based in Atlanta, Georgia, reviews both documents as a complete package so nothing falls through the cracks. Every family’s situation is different, and prior results in other cases do not guarantee similar outcomes in yours. What matters is that your plan is built around your specific goals and assets.

FAQs About How Trusts Are Taxed in Atlanta, Georgia

Does a revocable living trust have to pay its own taxes in Georgia?

No. A revocable living trust is treated as a grantor trust for federal and Georgia income tax purposes. That means all income the trust earns is reported on the grantor’s personal tax return. The trust itself does not file a separate income tax return or pay its own taxes while the grantor is alive and in control. Once the grantor passes away, the trust typically becomes irrevocable and may then need to file its own tax return using IRS Form 1041.

What is the top federal income tax rate for a trust in 2026?

In 2026, the top federal income tax rate for a non-grantor trust is 37%. What makes this significant is how quickly a trust reaches that rate. A trust hits the 37% bracket after earning just $16,000 in taxable income in 2026. By comparison, a single individual does not reach that same top rate until their income exceeds $640,600. This compressed bracket structure is one of the biggest reasons why trust income distribution planning is so important.

Will assets in my irrevocable trust get a step-up in basis when I die?

Not automatically. Under IRS Rev. Rul. 2023-2, assets held in an irrevocable trust that are not included in your taxable estate do not receive a step-up in basis at your death under IRC Section 1014. This means your beneficiaries inherit those assets at your original cost basis. If the assets have appreciated significantly, they could face large capital gains taxes when they sell. This is a key planning issue that Slowik Estate Planning addresses when helping clients choose between revocable and irrevocable trust structures.

Does Georgia have a separate trust income tax, and what is the rate?

Yes, Georgia taxes trust income at the state level. For 2026, Georgia applies a flat income tax rate of 5.19% to taxable income, including income earned by trusts with a Georgia connection. Georgia does not use tiered or progressive brackets for this purpose. The same 5.19% flat rate applies regardless of how much income the trust earns. Trust administration in Georgia is also governed by the Revised Georgia Trust Code of 2010 under O.C.G.A. Title 53, Chapter 12, which sets the rules for how trustees manage and account for trust assets.

How do trust distributions affect taxes for beneficiaries in Atlanta?

When a trust distributes income to a beneficiary, the tax responsibility generally shifts from the trust to the beneficiary. The trust deducts the distributed amount from its taxable income, and the beneficiary reports it on their own personal tax return at their individual income tax rate. The trust provides each beneficiary with a Schedule K-1 that shows their share of the trust’s income. If the beneficiary is in a lower tax bracket than the trust would be, distributing income can result in meaningful tax savings for the family overall. Distributions of principal, however, are generally not taxable to the beneficiary.

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