What is a notable tax implication of establishing a trust?

Establishing a trust has distinct tax implications that often include the potential for trust income to be subject to higher tax rates. Unlike individual taxpayers, trusts face a compressed tax bracket structure, meaning that trusts can reach the highest federal income tax rate at much lower levels of income. Individual taxpayers have a wider range of income before reaching higher tax brackets, while trusts hit the maximum rate after earning relatively minimal amounts.

This can result in a situation where income generated by the trust is taxed at a significantly higher rate compared to how the same income would be taxed if it were reported on an individual's personal tax return. Thus, it's critical for those involved in trust administration or planning to understand how income tax rates apply to trusts to ensure effective financial management and tax compliance.