Trusts Do Not Automatically Save You Money on Taxes
Many people assume that the simple act of setting up a trust will automatically reduce their income tax bill. This is a misconception. Whether or not a trust affects your taxes depends entirely on the way the trust is drafted, the type of trust, and the purpose it is intended to serve. For example, most revocable living trusts are classified as “grantor trusts” under Internal Revenue Code §§ 671–679. In this situation, the grantor retains enough control or beneficial interest that the IRS continues to treat the trust’s income as if it were the grantor’s own. In other words, if you earn the income, you still pay the tax on it—even if the income flows through the trust.
Even in the case of an irrevocable trust, which may remove assets from the taxable estate and thus potentially reduce estate tax liability, the income tax rules can be harsh. Trusts face compressed tax brackets under § 1(e)(1), reaching the maximum 37 percent federal rate once undistributed income exceeds roughly $14,450 in 2025. By contrast, individuals do not reach that top rate until much higher levels of income. Thus, the creation of an irrevocable trust without careful planning can actually accelerate income taxation rather than reduce it.
There are special trust vehicles, such as charitable remainder trusts under IRC § 664, that can create income tax deductions for the grantor at the time of funding. However, these are subject to complex payout and remainder requirements, and the deduction is calculated under § 170(f)(2). Similarly, qualified personal residence trusts (QPRTs) and grantor retained annuity trusts (GRATs) can provide estate tax advantages, but they are narrowly focused instruments that do not reduce ordinary income tax liability.
The real advantage of most trusts is not in lowering today’s income tax bill but in providing non-tax benefits such as avoiding probate, ensuring continuity of management during incapacity, and exercising greater control over how and when heirs receive distributions. These estate planning benefits can be powerful in their own right. It is therefore critical to recognize that while trusts are invaluable tools in planning, they are not substitutes for legitimate income tax reduction strategies such as retirement accounts, charitable contributions, or capital gains harvesting. In sum, trusts do not inherently save you money on taxes, but they can protect your assets and help you manage succession in ways no other planning vehicle can.
