Before we dive into what the non-grantor trust tax rates are, let’s start with the basics of what a non-grantor trust is and how it works.

A non-grantor trust is a type of trust that is a separate taxpayer for income tax purposes. This means the trust itself has to file a tax return and potentially pay taxes. This is in contrast to grantor trusts, where the grantor (typically the person who created the trust) has to report the trust’s income on their own tax return, and as a result the trust does not have to file its own tax return (here is a deep dive comparing grantor and non-grantor trusts). There’s a special part of the tax code that determines whether a particular trust qualifies as a non-grantor trust or a grantor trust, which we will dive into in another article.

How are Non-Grantor Trusts Taxed?

Non-grantor trusts have their own tax brackets that are different from the brackets for individuals. And here’s the important part — the tax rates for non-grantor trusts reach the top tax bracket at lower income levels than for individuals. For example, in 2024, a non-grantor trust hits the top federal tax rate of 37% after just $15,200 of income. But an individual single person doesn’t hit that 37% rate until they have over $609,350 of income! A married couple filing jointly doesn’t pay 37% until over $731,200 of income. So non-grantor trusts get pushed into that highest tax bracket way sooner than individuals do.

Why Do High Income Earners Use Non-Grantor Trusts?

So, if non-grantor trusts pay such high federal tax rates, why do rich people use them? There are a few major reasons:

1. Federal Income Tax Savings. While the tax brackets for non-grantor trusts are more compressed than for individuals, non-grantor trusts are taxed favorably in other ways. Non-grantor trusts are eligible for their own $10 million QSBS exclusions — a single QSBS-stacking non-grantor trust can save a family millions of dollars of income tax. Non-grantor trusts also get their own deductions and exemptions such as the $10,000 state and local income tax deductions, their own excess business loss deductions, and their own Section 199A small business tax deductions.
2. State Income Tax Savings. Some states have their own income taxes in addition to federal taxes. But a few states like Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming don’t have state income tax — and a few others do have state income taxes but don’t apply them to trusts in certain circumstances. By setting up non-grantor trusts in one of these zero-tax states, wealthy individuals can avoid paying state income tax on that money no matter where they personally live. This is especially helpful for people who live in high-tax states like California or New York.
3. Many HNW People are Already in the Highest Tax Bracket. Often, the people setting up non-grantor trusts are already in the highest federal tax bracket, so the fact that the non-grantor trusts they’re setting up are also in the highest tax bracket doesn’t make a difference: They’d be paying the same 37% tax rate regardless. Between avoiding state taxes and and paying a lower federal tax rate on the first $15,200 (in 2024) of trust income, over time non-grantor trusts can generate significant tax savings for high-earning individuals.
4. The Tax Rates May Not Matter. Trusts aren’t necessarily taxed on the income they generate; rather, they are taxed on the income they generate and retain. If they generate income but then distribute that income to beneficiaries in the same tax year, the beneficiaries (who may be in low tax brackets) will receive K-1s and pay tax on that income in lieu of the trust paying tax (technically, the trust would receive a deduction for “distributable net income”). If a trust isn’t paying income taxes because it distributes its income, it is irrelevant that it would theoretically be taxed at a high rate if it weren’t making distributions.
5. Estate Tax Savings. Certain irrevocable trusts, including most non-grantor trusts, can help wealthy people save on estate taxes. This is because the assets in the trust are not included in the grantor’s taxable estate when the grantor dies. The current federal estate tax exemption is 40% on assets over $13.61 million per person, but many rich families have significantly more than that. By putting assets in non-grantor trusts that are outside of their taxable estates, these individuals can pass more wealth to their heirs estate-tax free.
6. Asset Protection. In the United States, litigation is one of the biggest risks to wealth preservation. A lawsuit can undo years of savvy financial management. Here, non-grantor trusts can help. Because an irrevocable trust is a separate legal person, it is generally not subject to liability for actions taken by a trust’s grantor or beneficiary. So the grantor’s or beneficiary’s creditors won’t be able to access the trust’s assets even if they win their lawsuit against the grantor or beneficiary.
7. Privacy. When someone dies, their will becomes public record. But the details of trusts can remain private. By gifting assets to non-grantor trusts during their lifetimes, wealthy individuals can pass money to their beneficiaries without the whole world knowing the details. The rich often value this financial privacy.
8. Structure. Trusts allow rich people to put rules and conditions around how their money is used. For example, they could set up a non-grantor trust that pays for a grandchild’s education and living expenses but doesn’t let them access the full inheritance until they reach a certain age or milestone. This lets individuals pass on wealth in a controlled way.

The Bottom Line

In summary, non-grantor trusts are a tool often used by high-net-worth individuals and families for strategic tax planning, maintaining privacy, protecting assets, and providing structure for passing on wealth to the next generation. Wealthy grantors and beneficiaries need to weigh the pros and cons with their advisors. But in many cases, the benefits outweigh the costs, which is why these trusts remain popular among the affluent.

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