Trusts have long played a role in estate planning, but their potential for income tax savings is often overlooked. With estate tax exemptions at historically high levels, many clients will benefit more from tax strategies that reduce annual income tax burdens.
Several of the examples below are drawn from AICPA’s “Tax Trifecta” white paper, which explores new trust opportunities under the One Big Beautiful Bill Act.
Below are five effective ways to use non-grantor trusts to decrease taxes, along with a discussion of how stacking multiple trust benefits can magnify results.
1. Trusts for income shifting
A non-grantor trust is its own legal and taxable entity, separate from the person who created it. The trustee manages the trust and can distribute income to beneficiaries, who may be in lower tax brackets than the grantor, creating opportunities for meaningful tax savings.
When clients sit in the top tax brackets, distributing income to family members in lower brackets can create significant savings. By transferring property into a non-grantor trust and directing distributions to children or grandchildren, income shifts from the client’s high rate to the family’s lower rates.
The 2025 tax brackets for taxpayers are shown below:
| |
Individual |
Joint |
| 10% |
$0–$11,925 |
$0–$23,850 |
| 12% |
$11,926–$48,475 |
$23,851–$96,950 |
| 22% |
$48,476–$103,351 |
$96,951–$206,700 |
| 24% |
$103,352–$197,300 |
$206,701–$394,600 |
| 32% |
$197,301–$250,525 |
$394,601–$501,050 |
| 35% |
$250,526–$626,350 |
$501,051–$751,600 |
| 37% |
Over $626,350 |
Over $751,600 |
If a client in the 37% bracket creates a trust that earns $200,000 annually, distributing $20,000 to each of five children in the 22% bracket and five grandchildren in the 12% bracket reduces the family’s total tax bill from $74,000 to $34,000. That strategy saves $40,000 per year while keeping assets in the family.
Pro tip: Remember, any earnings within a non-grantor trust are taxed to the trust which is established as its own tax entity and at the higher and more compressed trust tax rates.
2. Trusts to expand the SALT deduction
The One Big Beautiful Bill Act (OBBBA) gave state and local tax (SALT) deductions a major boost, raising the cap from $10,000 to $40,000 beginning in 2025. Both individuals and non-grantor trusts can now claim the deduction.
However, the full $40,000 deduction begins to phase down once modified adjusted gross income (MAGI) exceeds $500,000. The phasedown reduces the deduction by 30 cents for every additional dollar of income. By $600,000 of MAGI, the $40,000 cap is fully reduced back to $10,000. Assuming income below $500,000 and state taxes of $40,000, the annual savings will be about $14,800 per trust.
This ability to “stack” multiple $40,000 deductions makes this one of the most compelling new uses of trusts. For example, take a family that creates six trusts for children and adult grandchildren. If each trust obtains a $40,000 SALT deduction, the savings are $14,800 per trust (.37 x $40,000) or $88,800 for the six trusts annually.
Trusts also allow clients to avoid the SALT deduction phaseout. In 2025, the phaseout reduces the deduction by 30% of the amount above $500,000, but it cannot reduce the deduction below $10,000. According to AICPA, a client with $1 million of annual income who transfers $500,000 of income into a non-grantor trust essentially doubles the opportunity. The client’s deduction increases by $30,000, while the trust claims its own $40,000 deduction. Together with the baseline $10,000 deduction, this produces $80,000 of total deductions in one year.
Pro tip: Note that a trust must have substantial state income to fully utilize the $40,000 SALT deduction and tax rates vary state to state. For example, Illinois has a flat 4.95% state income tax rate. To claim the full $40,000 SALT deduction in that state the taxpayer’s taxable income would have to be at least $808,080.08 ($40,000/.0495).
3. Trusts to increase Section 199A deductions
Section 199A provides a 20% deduction on qualified business income (QBI). The deduction begins to phase out once taxable income exceeds certain levels.
For 2025, trusts and single filers get the full deduction up to $197,300 of income. Between $197,300 and $247,300, the deduction is gradually reduced, and above $247,300 it is eliminated entirely. For married couples filing jointly, the range doubles, with the deduction phasing out between $394,600 and $494,600.
Because trusts count as non-corporate taxpayers, clients can shift business interests into multiple non-grantor trusts to keep income below the threshold. For example, according to AICPA, a business owner with $591,900 of QBI could divide the income among three trusts, each reporting $197,300. This structure allows all three to claim the full deduction, creating significantly more savings than if the income remained in one entity and exceeded the phaseout.
Pro tip: Advisors should be cautious when creating multiple non-grantor trusts. Under IRC Section 643(f), the IRS can combine trusts with the same grantor and primary beneficiaries if the main purpose is tax avoidance. To withstand scrutiny, each trust must have meaningful differences in beneficiaries or trust terms, and ideally a legitimate purpose beyond reducing taxes. With careful structuring, however, multiple trusts can provide a powerful way to preserve QBI deductions.
4. Trusts to stack QSBS exemptions
The OBBBA enhanced Section 1202 benefits in two key ways: It shortened the required holding period and increased the exclusion amount.
Instead of waiting five years, taxpayers can now exclude 50% of gains after three years, 75% after four years, and 100% after five years. The maximum exclusion also increased from $10 million (or 10 times basis) to $15 million (or 10 times basis).
Because the exclusion applies per taxpayer, transferring qualified small business stock (QSBS) to non-grantor trusts can multiply the benefit. Each trust counts as a separate taxpayer eligible for its own exclusion. However, the same caution form above applies here as well.
Consider a client who starts a C-corporation with minimal capital. Immediately after formation, they gift half the stock to a non-grantor trust for their child. Five years later, the company is worth $20 million total.
- Without trust planning: The client sells all shares and can exclude $10 million under the old rules, paying tax on the remaining $10 million.
- With trust planning: The client sells their half ($10 million) and excludes it entirely. The trust sells its half ($10 million) and also excludes it entirely. Result: zero taxable gain on the entire $20 million sale.
The key is making the gift early in the company’s lifecycle when the stock value is minimal, allowing both the grantor and trust to benefit from the full appreciation and exclusion.
Pro tip: Early planning is critical. The stock must be transferred before significant appreciation occurs. This strategy also works with transfers to family members, LLC members, or partnership interests, not just trusts.
5. Trusts to save state income taxes
One of the most powerful benefits of a non-grantor trust is the ability to avoid state income taxes altogether. By establishing the trust in a jurisdiction with no state income tax and ensuring it does not have a resident trustee or local administration, the trust can sidestep tax on non-sourced income.
In many cases, eliminating state income tax provides far greater savings than simply capturing the $40,000 SALT deduction.
Pro tip: Planning with state income tax in mind can benefit both high-tax state residents and clients in no-tax states who earn income sourced to other jurisdictions. In addition, distributing some of the trust’s taxable income to beneficiaries in lower brackets can create even more savings.
6. Important considerations
While these trust strategies offer significant tax benefits, they come with important trade-offs that clients should understand:
- Loss of control: Assets transferred to non-grantor trusts are no longer under the grantor’s direct control.
- Irrevocability: Most transfers cannot be easily undone if circumstances change.
- Compliance costs: Each trust requires separate tax filings and ongoing administration.
- State law variations: Trust taxation rules vary significantly by state and may change over time.
Proper legal and tax counsel is essential before implementing any of these strategies.
The ‘tax trifecta’
Trusts have evolved beyond estate planning into powerful income tax reduction tools. While each strategy offers standalone benefits, the greatest value comes from stacking multiple approaches.
A trust combining state tax avoidance, SALT deductions, and Section 199A benefits creates a compelling “tax trifecta” that transforms marginal cases into clear wins for high-net-worth clients.
Sources
- Thomson Reuters, Qualified Business Income Deduction (Section 199A)
- Bipartisan Policy Center, SALT Deduction Changes in the One Big Beautiful Bill Act (OBBBA)
- AICPA-CIMA, Tax Trifecta: Trust Planning After the One Big Beautiful Bill Act (OBBBA)
- Corient, What the One Big Beautiful Bill Could Mean to Business Owners