How are trusts and estates taxed for income tax purposes?
A trust is created when you (the grantor) transfer property to a trustee for the benefit of a third person (the beneficiary). An estate is the assets and liabilities left by a person at death. Both a trust and an estate are separate, legal, taxpaying entities, just like any individual. Income earned by the trust or estate property (e.g., rents collected from real estate) is income earned by the trust or estate. Who is liable for taxes on income earned by a trust depends on who receives or retains benefits from the trust (i.e., the trust entity, the beneficiaries, the grantor, or the powerholder). Who is liable for taxes on income received by an estate depends on how the income is classified (i.e., income earned by the decedent, income earned by the estate, income in respect of the decedent, or income distributed to beneficiaries). In general, trusts and estates are taxed like individuals. General tax principles that apply to individuals also apply to trusts and estates. A trust or esta
