Irrevocable trusts can be valuable estate planning tools. They can help protect assets from being spent down on nursing homes, manage wealth for future generations, and accomplish important estate and tax planning goals. But there is another side of irrevocable trusts that trustees and beneficiaries should understand: income tax.

An irrevocable trust is not necessarily taxed differently simply because it is irrevocable. The important question is whether the trust is treated as a grantor trust or a non-grantor trust for income tax purposes. With a grantor trust, the person who created the trust generally remains responsible for reporting the trust’s income on their individual income tax return. With a non-grantor trust, however, the trust itself may bear the income tax burden.

Why Can Income Taxes Be So High?

One of the biggest issues with non-grantor irrevocable trusts is that federal income tax brackets for trusts are highly compressed. For 2026, this type of trust reaches the federal income tax bracket of 37% once its taxable income exceeds $16,000. By comparison, an individual generally does not reach the highest federal bracket of 37% until taxable income exceeds $640,600 (or, for a married couple filing jointly, $768,700).

That means an irrevocable trust with a relatively modest amount of taxable investment income can find itself paying federal income tax at a high marginal rate.

Massachusetts has its own rules. Most Massachusetts income is taxed at 5%, while certain short-term capital gains are taxed at 8.5% and certain collectible gains at 12%. The Massachusetts rules can therefore add another layer of tax to trust income, depending on the type and amount of income involved.

Planning Ahead Can Make a Significant Difference

Good estate planning does not end when an irrevocable trust is signed. Once a trust is established and funded, trustees and beneficiaries should periodically review how the trust’s assets are invested, how income is being generated, and how distributions are being made.

For example, a trust holding substantial interest-bearing investments or dividend-producing assets may generate significant taxable income every year. The trustee may have opportunities – depending on the trust document and applicable law – to consider different investments or distribution strategies that could affect who ultimately pays the tax.

There may also be opportunities to coordinate trust distributions with a beneficiary’s individual tax situation. A beneficiary who is in a lower tax bracket, for example, may have a very different tax liability from the trust itself. These decisions need to be evaluated carefully because the rules governing trusts are technical, and the terms of the particular trust document matter.

Estate Planning Strategies May Help

The good news is that an irrevocable trust’s income tax burden is not necessarily something families simply have to accept. Depending on the circumstances, estate planning attorneys and tax professionals can explore strategies designed to reduce or better manage that burden.

Potential strategies may include reviewing whether trust assets are invested in a tax-efficient manner, coordinating distributions with beneficiaries, and considering whether the trust document permits actions that can improve the overall tax result. In some cases, changes to the trust’s administration or carefully structured estate planning techniques may provide additional flexibility.

These strategies are highly fact-specific. A solution that works well for one trust could be inappropriate for another, particularly because irrevocable trusts generally cannot be changed as freely as revocable trusts.

Don’t Let an Unexpected Tax Bill Undermine Your Estate Plan

Irrevocable trusts can accomplish important goals, but their income tax consequences deserve attention. Because trusts can reach high federal tax brackets with relatively little taxable income, simply leaving investment income inside a trust year after year can create an unnecessary tax burden in some circumstances.

Beneficiaries should understand that receiving an inheritance through a trust does not necessarily mean the tax consequences are straightforward. Trustees, beneficiaries, and their advisors should work together to understand where taxable income is being generated, who is responsible for the tax, and whether planning opportunities are available.

The best time to address trust income taxes is before an unexpected tax bill arrives. A periodic review with an estate planning attorney and tax advisor can help ensure that an irrevocable trust continues to accomplish its intended goals while avoiding avoidable income tax costs.

Attorney Leah A. Kofos is a senior associate attorney with the Dedham firm of Samuel, Sayward & Baler LLC, which focuses on advising its clients in the areas of Trust and estate planning, estate settlement, and elder law matters. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit ssbllc.com or call 781-461-1020.

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