795 / How is the federal income tax computed for trusts and estates?

Taxable income for trusts and estates is computed by subtracting the following from gross income: allowable deductions; amounts distributable to beneficiaries; and the exemption. Estates are allowed a $600 exemption. For trusts that are required to distribute all their income currently, the exemption is $300; for all other trusts, $100. Certain trusts that benefit disabled persons may continue to use the personal exemptions that were available to individuals for tax years beginning before 2018 and after 2025.¹ A standard deduction is not available.² Rates are determined from a table for estates and trusts.

Planning Point: The United States Supreme Court ruled in North Carolina Dep’t of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, No. 18-457 (U.S. June 21, 2019) that the due process clause prevents states from imposing a state-level tax on undistributed trust income based solely on the fact that a trust beneficiary resides in the state.

For estates of decedents dying after August 5, 1997, an election may be made to treat a qualified revocable trust as part of the decedent’s estate for income tax purposes. The election must be made by both the executor of the estate and the trustee of the qualified revocable trust. A qualified revocable trust is a trust that was treated as a grantor trust during the life of the decedent due to his power to revoke the trust (see Q 797). If such an election is made, the trust will be treated as part of the decedent’s estate for tax years ending after the date of the decedent’s death and before the date that is two years after his death (if no estate tax return is required) or the date that is six months after the final determination of estate tax liability (if an estate tax return is required).³

Generally, income that is accumulated by a trust is taxable to the trust, and income that is distributable to beneficiaries is taxable to the beneficiaries.⁴ A beneficiary who may be claimed as a dependent by another taxpayer may not use a personal exemption (prior to 2018), and his standard deduction may not exceed the greater of (1) $500, as indexed ($1,300 in 2024, $1,250 in 2023, $1,150 in 2022, $1,100 in 2019-2021); or (2) $250, as indexed ($450 in 2024, $400 in 2022-2023, $350 in 2013-2021) plus earned income.⁵ The amount of trust income which can be offset by the basic standard deduction will be reduced if the beneficiary has other income (see Q 728, Q 752). Also, trust income taxable to a beneficiary under nineteen years of age (24 for certain students) may be taxed at the parents’ marginal tax rate (see Q 679) prior to 2018 (for tax years beginning after in 2018 and 2019, taxpayers had the option of electing to apply trusts and estates tax rates to the unearned income of minors).⁶

A charitable remainder trust is generally not subject to income tax (see Q 8102). However, beneficiaries of a charitable remainder trust are taxable on distributions (see Q 8099). A charitable lead trust is generally taxable as a grantor trust (see Q 797) if an upfront charitable deduction is claimed (see Q 8105). Otherwise, a charitable lead trust is generally taxed as described here. Proposed regulations would treat annuity distributions from charitable lead annuity trusts (CLATs) and unitrust distributions from charitable lead unitrusts (CLUTs) as made proportionately from all categories of trust income. State law or trust provisions providing otherwise would be ignored. The regulations would prevent such a provision from being used, for example, to allocate all taxable income to the charitable distribution with capital gain and tax-exempt income retained by the trust.⁷