Is Your Trust Aligned with Your Tax Planning?

When most people think of setting up a trust, they focus on avoiding probate or protecting their loved ones—but few consider how their trust impacts their tax strategy. Unfortunately, that oversight can lead to missed opportunities or unexpected tax consequences down the line.

1. Not All Trusts Are Taxed the Same

The tax treatment of your trust depends heavily on whether it’s revocable or irrevocable.

• A revocable living trust is typically ignored for income tax purposes while you’re alive. That means all income is reported on your personal tax return as usual.
  
• An irrevocable trust, on the other hand, is often treated as a separate tax entity and may be subject to its own tax return (Form 1041). These trusts hit the highest tax bracket much faster—reaching the top federal rate after just a few thousand dollars in income.
  

If you’ve created an irrevocable trust for asset protection or long-term planning, you need to be aware of how it’s being taxed today—and whether your beneficiaries are likely to face unnecessary tax burdens in the future.

2. Step-Up in Basis: Don’t Miss It

One of the most powerful tax benefits in estate planning is the step-up in basis. When someone inherits certain assets—like real estate or stocks—the cost basis typically resets to the asset’s value on the date of death. That can dramatically reduce capital gains tax if the asset is later sold.

But here’s the catch: some irrevocable trusts may unintentionally remove assets from your taxable estate—meaning your beneficiaries could lose that step-up. It’s crucial to review how your trust is structured and whether your assets will qualify for this benefit.

3. Preparing for the 2026 Estate Tax Sunset

Right now, the federal estate tax exemption is historically high (over $13 million per individual). But it’s set to be cut in half in 2026, which could leave more families exposed to estate taxes than ever before.

If your estate could exceed the reduced threshold, your trust should be part of a larger tax mitigation strategy that may include:

• Lifetime gifts to irrevocable trusts
  
• Spousal Lifetime Access Trusts (SLATs)
  
• Charitable planning
  
• Business valuation and discounts
  

Your trust can be an incredibly powerful vehicle in these strategies—but only if it’s structured with taxes in mind.

4. Coordination Is Key

Estate planning doesn’t happen in a silo. Your estate attorney, CPA, and financial advisor should work together to ensure:

• Your trust aligns with your overall tax and wealth transfer goals
  
• Your assets are titled correctly to take advantage of trust benefits
  
• Income and estate tax issues are spotted—and addressed—before they become a problem
  

If these professionals aren’t regularly coordinating, something important could fall through the cracks.

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Bottom line? A trust is a smart tool—but only if it’s working in concert with your tax strategy. If you haven’t reviewed your plan recently, now is the perfect time to make sure everything is aligned and optimized.