Most conversations about irrevocable trusts focus on what the trust protects. Taxes come up later, usually when the first return is due and someone asks who pays it.
The answer depends on how the trust is written and what it does with its income during the year. It can be the person who set up the trust, the trust itself, or the people who receive money from it. Those three are taxed very differently, and trust tax rates on income the trust keeps are steep.
The Grantor Pays
Some irrevocable trusts are set up so the person who created the trust keeps paying the income tax personally, even though the assets are out of their estate. That happens when the trust gives them certain powers, such as the right to swap assets in and out for something of equal value.
This is often the point. When you pay the tax yourself, the trust keeps growing and the tax does not eat into it, and those payments are generally not treated as another gift.
The swap power is useful for a second reason. Property inside an irrevocable trust usually does not get a fresh cost basis at death the way inherited property does. Barron’s reports that some people use the swap to pull low-basis stock out of the trust and put cash or other assets in its place. The values have to be equal and the trust has to be set up correctly, so your attorney, CPA, and financial advisor need to agree on the plan first.
The Trust Pays
If it is not a grantor trust, the trust files its own return and pays tax on any income it holds onto. The rates look familiar. The income levels do not. Barron’s explains that a trust hits the highest bracket after a fairly small amount of income, far sooner than an individual filer would.
A trust holding dividend stocks or a rental property can get there in its first year. It is worth reviewing whether to keep or pay out income every year, not just when the trust is signed.
The Beneficiaries Pay
When a trust pays income out, the tax generally goes with it. Beneficiaries get a Schedule K-1 and report their share on their own returns, often at lower rates than the trust would have paid.
Timing matters, and so does who is receiving the money. A payment to someone on needs-based benefits can affect their eligibility, which is a separate problem from taxes. Good records and a trustee who knows what the trust allows make trust administration much smoother.
What Trust Tax Rates Brighton Residents Should Know
Massachusetts has its own estate tax, and it does not match the federal one. Planning around the federal exemption alone can leave a state problem behind. Between home values around Boston and retirement savings, more people cross that line than expect to. Both thresholds change from time to time, so a plan that fit when you signed it may not fit today. If you are looking at estate planning in Brighton, raise taxes early rather than after the trust is funded.
Key Takeaways
- Tax on an irrevocable trust falls on the grantor, the trust, or the beneficiaries.
- When the grantor pays, the trust grows without tax chipping away at it each year.
- Trusts reach the highest bracket at much lower income levels than people do.
- Paying income out usually shifts the tax to beneficiaries at their own rates.
- Massachusetts estate tax is a separate question from the federal exemption.
Deciding Who Pays
Someone will pay tax on that trust. Sorting out who before the trust is funded is much easier than fixing it later. Estate and Elder Law Advisory PLLC walks clients through these choices and revisits them as the rules change. Attorney Artika Angel holds the Accredited Estate Planner (AEP®) designation and can look at how your trust would be taxed and what that means for the people you are planning for. Book an initial call to learn more.
References: Barron’s (May 17, 2026) “Want to Benefit From Stock Market Volatility? Tweak Your Trust” and Kiplinger (May 29, 2026) “How to Help Prevent Taxes From Taking a Massive Bite Out of a Special Needs Trust“
