Trust
Definition
A legal arrangement in which a trustee holds and manages assets on behalf of beneficiaries. For tax purposes, trusts are either grantor trusts (where income is taxed to the creator) or non-grantor trusts (which are separate tax entities filing Form 1041). Common types include revocable living trusts, irrevocable trusts, charitable remainder trusts, and special needs trusts. Trusts reach the highest tax bracket (37%) at just $15,200 of income in 2025, making distributions to beneficiaries a common tax strategy.
Example
You create an irrevocable trust holding $500,000 in investments. The trust earns $30,000 in income. If it distributes $25,000 to beneficiaries, only $5,000 is taxed at the trust level; the rest is taxed on beneficiaries' individual returns at potentially lower rates.