May 27, 2026
Trust Basics
Many people hear the word trust and think “ that is for wealthy people”. In truth trusts can be a helpful tool for anyone who wants to plan for the future, protect assets or avoid probate court costs at the time of death.
This article is for educational purposes only and should not be considered legal or tax advice. Always consult with an attorney or your accountant before making any decisions on trusts.
What Is a Trust?
A trust is a legally recognized relationship in which an individual (trustee) holds and administers property for the benefit of a designated person (beneficiary). The person who creates the trust is known as the grantor.
The grantor creates the trust by transferring property (assets) into the trust. Grantors also dictate the rules of the trust such as how property passes at the time of death. The assets placed into a revocable trust can still accumulate income, be removed from the trust, or sold. If the grantor places property in an irrevocable trust, those assets typically cannot be removed from the trust and the grantor generally does not receive benefits from the trust. Later I will discuss more about revocable and irrevocable trusts.
The trustee also plays an important role in the trust. The trustee is legally obligated to follow the rules of the trust as dictated by the grantor and to act in the best interest of beneficiaries. It is important to pick a trustee you can trust. You will also want a successor trustee, which is someone designated to take over as trustee if the original cannot continue the management of the trustee. If you cannot think of a person who is qualified and interested in performing these duties, you may look at professionals that you work with (legal counsel or CPA) or institutional trustees (typically banks). These trustee services often come with fees that will be paid from your trust after you pass away. The trust agreement generally addresses the ability of the trustee to charge fees for services.
Beneficiaries have the least amount of obligations to the trust but they receive the most benefit. You can have multiple beneficiaries or even charitable organizations.
Now that you understand the roles within a trust, let’s compare the most common types of trusts.
Types of Trusts
While there are many types of trusts, we are going to be focusing on the two main trusts, revocable and irrevocable. Revocable trusts are sometimes called living trusts. For income tax purposes, in the eyes of the IRS, these don’t exist as separate taxable entities. All of the income from the property placed in the trust is still reported on the grantor’s individual tax return. The revocable trusts allow the grantor to have full control over the property placed in the trust. Which means the trustee, generally the grantor, can move property out of the trust whenever they want or as needed for future grantor care.
One of the main benefits of using a revocable trust is avoiding probate court after you pass away. This avoids certain court costs and may be designed to allow more flexibility to pay bills and maintain assets. A downside of a revocable trust is that all assets are still included as part of your estate at death and generally assets are subject to creditor claims.
Irrevocable trusts work differently than revocable trusts. These are separate taxable entities and will have their own EIN. Any income generated by the property placed in the trust will need to be reported on a trust tax return. Typically, once the grantor places property into an irrevocable trust, they give up the rights to the property and can’t remove it from the trust. Beneficiaries are typically locked in unless changed by court order. There are some creditor protection benefits that may be available and should be discussed with legal counsel.
The Stepped-Up Basis Trap
You may be asking “what is a step-up in basis”. Basis is what you paid for an asset, or what you can recover without additional tax on the ultimate sale of that asset. When you pass away, the assets that you own at the time of your death pass to your beneficiaries at current fair market value, which is referred to as the step-up in basis. This is especially helpful on real estate that has been held for a long time. If the beneficiaries inherit property they do not want to keep, they generally will not pay taxes on the increase in value over cost. As mentioned above, typically assets placed into an irrevocable trust do not receive a step-up in basis. They instead receive the basis you (the grantor) had in the asset at the time of the transfer to the trust. It is important to carefully plan the assets you place into an irrevocable trust to help future beneficiaries avoid large taxes. For example, you own a home that you purchased in 1995 for $35,000. You place this home into an irrevocable trust in 2026. The trust sells the home for $185,000 after you have passed. Because the trust receives the grantor’s basis the taxable capital gain would be $150,000. If the house is owned personally or in a revocable trust the basis of the house is stepped up to $185,000 (assuming this is fair market value at the time of death) resulting in no taxable gain. Now that you understand the stepped-up basis trap, let’s discuss another caveat with trusts which is the high tax rate.
Tax Rates for Trusts
The highest federal tax rate for calendar year 2025 for both a trust and individual is 37% but the income level subject to that rate differs dramatically. For 2025, an individual was subject to 37% tax on income at or above $626,351. A trust is subject to that rate when undistributed income reaches $15,650. It is imperative to work with your tax CPA to carefully plan distributions and expenses to minimize the tax burden. State taxes at the trust level are generally due in the state in which the trustee resides and provides services.
Final Thoughts
There are many different types of rules and implications when using a trust. Our goal is to provide basic information to be able to start thinking about the use of trusts to fit your estate and income goals. We are here to provide assistance and work with your legal counsel to continue this plan and move towards those goals.
This article is for educational purposes only and should not be considered legal or tax advice. Always consult with an attorney or your accountant before making any decisions on trusts.