Tax Implications of Putting Your Investment Account in a Trust

Several listeners have recently asked about trusts and their tax implications in retirement, particularly whether placing investment accounts into a trust changes how those assets are taxed. To help clarify the topic, we partnered with Clifton Ross, CEO and founder of Guardian Resources, a fiduciary wealth management firm in Minneapolis, to walk through how trusts work, how they are taxed, and what investors approaching retirement should understand before making any changes to their accounts.

Investors approaching retirement often wonder whether they should place investment accounts into a trust and what that decision might mean for their taxes. The answer is not always straightforward. The tax treatment depends on the type of trust involved, how investment income flows through the structure, who ultimately pays the taxes, and whether retirement accounts are involved, which come with their own IRS rules.

In this guide, we break down the key types of trusts, how trust taxation works, and the important distinctions between investment accounts and retirement accounts when planning your estate.

What Is a Trust and Why to Put an Investment Account in a Trust

A trust is a legal arrangement where you, the grantor, transfer assets to a trustee who manages them on behalf of your beneficiaries. When you put an investment account in a trust, ownership shifts from your name to the trust itself and the trustee takes over management according to the terms you set in the trust document. Simple concept. The execution is where things get complicated.

People nearing retirement often choose to put brokerage accounts, stock portfolios, bond holdings, mutual funds and ETFs into a trust for a handful of practical reasons. Trusts let you avoid probate, which saves time and legal costs for your heirs. They give you more control over how and when beneficiaries receive assets, which matters if you have younger heirs or family members who may not be ready to manage a large inheritance. And they can be a central piece of a broader estate planning strategy designed to protect wealth across generations.

But here is the part that too many people overlook: the moment you put an investment account into a trust, the tax treatment of that account may change dramatically depending on the trust structure you pick. Some trusts are essentially invisible to the IRS. Others are treated as entirely separate taxpayers with their own compressed tax brackets and filing requirements. Understanding those differences before you make the move is critical.

Types of Trusts and How Trust Taxation Works

Not all trusts are created equal when it comes to trust taxation, and the type you choose will determine almost everything about how income is reported, who pays the taxes and what rates apply. Based on my experience working with hundreds of families in retirement planning, I would say that misunderstanding trust types is the single most expensive mistake people make in this space.

Revocable Trust vs Irrevocable Trust

A revocable trust, sometimes called a living trust, is one you can change, amend or dissolve entirely during your lifetime. You keep control. You remain the trustee. The IRS treats it as a grantor trust, meaning for income tax purposes the trust does not exist separately from you. All investment income, capital gains, dividends and interest get reported on your personal tax return just like before. No separate filing. No new tax ID number required while you are alive.

An irrevocable trust is different. Once you transfer assets into it, you generally give up control and you cannot easily take them back. The tradeoff is that assets inside an irrevocable trust may be removed from your taxable estate, which can mean significant estate tax savings for people with larger portfolios. But giving up control also means the trust may become its own taxable entity, and that is where things get expensive if you are not careful.

Grantor Trusts vs Non-Grantor Trust Structures

The IRS does not care what you call your trust. What matters is whether the trust qualifies as a grantor trust or a non-grantor trust, because that classification drives the entire tax picture.

Grantor trusts include revocable living trusts and intentionally defective grantor trusts, known as IDGTs. In both cases the grantor retains enough control or interest that the IRS says you are still the taxpayer for income purposes. A non-grantor trust is a separate taxable entity with its own tax ID number, its own filing obligations and its own set of aggressively compressed tax brackets. The distinction matters enormously. Here’s a breakdown of each type.

Grantor Trusts: Trust Tax, Tax Rates, and Investment Income Considerations

If your investment account sits inside a grantor trust, the tax implications are relatively straightforward. Any investment income generated by the account, whether that is dividends from stocks, interest from bonds or capital gains from selling positions, flows directly to your personal tax return. The trust itself does not pay a separate trust tax. Your individual tax rates apply.

This is the main reason revocable living trusts are so popular with retirees. You get the estate planning benefits of probate avoidance and asset control without changing your tax situation at all. Your financial advisor and CPA do not need to file a separate return for the trust. Your cost basis on investments stays the same. The IRS essentially looks through the trust as if it does not exist for income tax purposes.

There is an additional benefit worth mentioning here that I have seen make a real difference for families: when a grantor trust holds investment accounts and the grantor passes away, those assets may receive a step-up in basis. That means your beneficiaries inherit the investments at their current market value rather than the original purchase price, which can wipe out years of unrealized capital gains and save your heirs a substantial amount in taxes when they eventually sell.

One thing to keep in mind, though. A grantor trust does not help you reduce estate taxes while you are alive because the assets still count as part of your taxable estate. If estate tax exposure is a concern, you may need to look at irrevocable structures.

Non-Grantor Trust Taxation, Trust Tax Rules, and Tax Rates

Non-grantor trust taxation is where I have seen the most surprises, and rarely good ones. When a non-grantor trust holds investment accounts, the trust is its own taxpayer. It files its own return on IRS Form 1041 and pays taxes on any income it retains.

Here is the problem. Trust tax brackets are brutally compressed. In the 2026 tax year an individual does not hit the top federal income tax rate of 37% until taxable income exceeds roughly $640,600. A non-grantor trust hits that same 37% rate at just $16,000 of taxable income. That is not a typo. Sixteen thousand dollars. On top of that, non-grantor trusts with undistributed investment income above $16,000 may also be subject to the 3.8% net investment income tax, compared to the $200,000 threshold for single individual filers.

The math is painful. If your trust retains $50,000 in investment income from dividends and capital gains, a huge chunk of that is taxed at the highest federal rate. An individual with the same income would pay far less. This is why experienced estate planning attorneys and financial advisors often recommend distributing trust income to beneficiaries whenever possible instead of letting it accumulate inside the trust.

When a non-grantor trust distributes income to a trust beneficiary, the trust gets a deduction for the distribution and the beneficiary reports that income on their own return using Schedule K-1. If the beneficiary is in a lower tax bracket, the overall tax burden drops significantly. It is one of the most effective strategies for managing trust tax liability and one I recommend to clients regularly.

Not every trust can or should distribute all income, though. Some trusts are set up specifically to accumulate and protect assets for beneficiaries who are minors, who have special needs or who may not be ready to manage large sums of money. In those cases the trust absorbs the higher tax rates as the cost of protection and control. It is a deliberate tradeoff.

Tax Considerations for Investment and Retirement Accounts in Trusts

This is where I need to draw a sharp line that too many people miss. Investment accounts and retirement accounts are not the same thing when it comes to trusts, and confusing the two can trigger a tax disaster.

Non-retirement investment accounts, your brokerage accounts holding stocks, bonds, mutual funds and ETFs, can generally be retitled in the name of your trust without any immediate tax consequences. You are simply changing the ownership label. No sale occurs. No capital gains are triggered. The assets continue to be managed and invested the same way.

Retirement accounts are a completely different story.

Should Retirement Accounts Be Put Into a Trust?

No. This is one of the clearest answers in estate planning and I cannot stress it enough. You should not put retirement accounts, your IRA, Roth IRA, 401(k), 403(b) or similar accounts, directly into a trust. The IRS requires that these accounts remain individually owned. If you retitle a retirement account in the name of a trust, the IRS treats it as a full distribution. That means:

• The entire balance becomes taxable as ordinary income in the year of transfer
• If you are under 59½, you face an additional 10% early withdrawal penalty
• You permanently lose the tax-deferred or tax-free growth status of the account
• The retirement account ceases to exist as far as the IRS is concerned

I have seen this mistake happen and the financial damage is severe and irreversible.

What you should do instead is name your trust as the beneficiary of your retirement accounts. This approach keeps the account in your name during your lifetime, preserving all tax advantages, while allowing the trust to receive and manage the assets after your death. Your trust beneficiary designations then control how those retirement funds are distributed to your heirs and on what timeline.

Keep in mind that if you name a trust as the beneficiary of an IRA or 401(k), the trust generally needs to qualify as a “see-through” trust to get the most favorable distribution timeline under current IRS rules. Under the SECURE Act, most non-spouse beneficiaries must withdraw the entire inherited account within ten years of the original owner’s death, and how the trust is structured, whether as a conduit trust or an accumulation trust, determines who pays the income tax on those distributions and at what rate.

A conduit trust passes all distributions directly through to the beneficiary, who pays tax at their individual rate. An accumulation trust gives the trustee discretion to hold funds inside the trust, but any retained income gets hit with those compressed trust tax rates I mentioned earlier. The right choice depends on your family’s circumstances, the beneficiary’s financial maturity and your overall wealth transfer goals.

Making the Right Move for Your Retirement

The tax implications of placing an investment account into a trust are generally manageable if you understand the rules before making changes. Grantor trusts, such as revocable living trusts, often keep the tax picture relatively simple because income continues to be reported on your personal return. For many retirees, they serve as a practical starting point if the goal is to avoid probate and maintain control of assets without altering how those assets are taxed. Non grantor trusts can provide additional estate planning and asset protection benefits, but they introduce compressed tax brackets and additional reporting requirements that require thoughtful planning around income distributions.

Retirement accounts are a different matter. In most cases, you should not place the account itself inside a trust. Instead, the trust can be named as the beneficiary. That distinction matters because retirement accounts carry their own IRS rules around distributions, and structuring them incorrectly can lead to unnecessary taxes or penalties.

For long term investors, the larger lesson is that estate planning should support the same principles that guide sound investing in the first place: clarity, discipline, and a focus on preserving capital across generations. Structures like trusts are tools. Used thoughtfully, they can help ensure that the wealth you spent decades building continues to compound and benefit the people you care about long after you are gone.