Tax Considerations for Trusts and Estates

hannah goscha, tax manager
accounting intern: claire donahoe

A trust or estate provides a way to manage property and finances while protecting the assets of the people involved. There are various tax considerations regarding trusts and estates, so it’s essential to understand what you need to do to stay compliant with laws and regulations. This blog post will outline some of the key tax issues for trusts and estates, so you can be sure you’re utilizing all possible tax advantages.


What is a Trust?

A trust is a legal arrangement in which one party, the trustee, holds the property on behalf of another party, the beneficiary. The grantor is the individual who creates the trust fund and is usually the owner of the trust’s assets. The trustee is responsible for managing the trust and ensuring that the beneficiaries receive the benefits specified in the trust agreement.


Types of Trusts

There are three main types of trusts: simple, complex, and grantor. Simple trusts must meet three requirements:

  • Trust income must be distributed annually.
  • There can be no charitable beneficiaries.
  • No distributions of trust principal can be made.

A trust that doesn’t meet those requirements would be a complex or grantor trust. Grantor trusts are treated as if the grantor is the owner of the trust for income tax purposes. Non-grantor trusts, on the other hand, pay tax at the trust level and distribute income to the beneficiary, which will be reported on the issued K-1.

Trusts can be an essential part of estate planning and can help individuals minimize their tax liability and protect their assets. Learn more about the different types of trusts by reading our previous blog.


Does a trust file a tax return?

Once a simple or complex trust is created, it must file a tax return called Form 1041 if it has a gross income of $600 or more. Trusts must also provide a Schedule K-1 to all the trust beneficiaries. The beneficiaries will then use this information to report their share of the trust’s income on their personal Form 1040 tax return.


What are some deductions that trusts can claim?

You can use a trust for various purposes, including estate planning and asset protection. As with other legal entities, there are certain deductions that trusts can claim that can help reduce the overall tax liability of the trust. These deductions include:

  • Trustee fees– Fees paid to the trustee for managing the trust
  • Administrative expenses– Costs associated with managing the assets of the trust
  • Investment advisory fees– Fees paid to an investment advisor to manage the trust’s assets
  • Legal fees– Legal costs associated with forming and maintaining the trust
  • Tax preparation fees– Costs related to preparing and filing the trust’s tax return
  • Income distribution deductions– Deductions taken for distributing income to the beneficiaries
  • Real estate/property taxes – Taxes paid on property owned by the trust
  • Charitable contributions – Donations made by the trust to a qualified charitable organization


Trust Rules to Consider

65 Day Rule

The 65-day rule states that a trustee can make distributions to trust beneficiaries within 65 days after year-end, and those distributions can be treated as if they were made in the previous tax year. Therefore, if you want distributions to be considered part of the previous tax year, the deadline to make them is March 6th. This rule applies to discretionary trusts (those in which the trustee can use their discretion about using the trust’s income and capital) and estate distributions.

10 Year Rule

Another important rule to be aware of is the 10-year rule, which says that any property left in a trust must be distributed within ten years of the settlor’s death. Failure to do so could result in a significant tax bill.


Estate Tax Considerations

Estate and inheritance taxes are two primary tax considerations to keep in mind when someone dies. Both taxes depend on where the person lived before they died. Most estates are not large enough to be taxed, as the federal estate tax only applies if the deceased person’s assets are $12.06 million or more. Many states are getting rid of state and inheritance taxes, which is quite controversial. Nebraska does not have estate taxes.


Estate Tax Reduction Options

There are several ways to reduce the amount of estate tax owed. One way is to give gifts to family members during your lifetime. You can also set up a family-limited partnership, which can help to minimize estate taxes. Another option is to make charitable donations through a trust. Alternatively, you can set up an irrevocable life insurance trust to help pay off any estate taxes owed. By taking advantage of these strategies, you can reduce the estate tax owed and ensure that your loved ones are taken care of after you pass away.

If you have any questions or would like more information about our accounting and consulting services, please don’t hesitate to contact us.


Hannah Goscha




Hannah Goscha is a Tax Manager at Lutz. She began her career in 2018. She is responsible for providing tax consulting and compliance services to clients with a focus on partnerships, corporations, nonprofits, trusts and estates.

  • Tax
  • Accounting & Consulting
  • Nonprofit Industry
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Master's in Accounting, University of Nebraska, Omaha, NE
  • Lutz Gives Back, Co-President


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