What factor contributes to higher taxation on trust income?

The tax filing status of the trust itself significantly influences the taxation of trust income. In the United States, trusts can be classified primarily as either grantor trusts or non-grantor trusts.

Grantor trusts, where the income is attributed to the grantor, generally do not face separate taxation at the trust level; rather, the grantor reports the income on their personal tax return. In contrast, non-grantor trusts are treated as separate taxable entities. They have their own tax filing obligations and are subject to tax at potentially higher rates on income that is not distributed to beneficiaries.

As the income of a non-grantor trust accumulates, it can fall into higher tax brackets sooner than individual taxpayers, thus leading to a higher effective tax rate on that income. This filing status, therefore, plays a crucial role in determining how much tax the trust will owe on its income and shows how the structure and type of trust can lead to varying tax implications. This understanding is essential for effective trust management and tax planning strategies.