Ed Enoch with Enoch Tarver explains: What is the difference between a will and a revocable living trust, which one do you actually need, and how do taxation rules function during estate and trust administration?

Wills vs. Revocable Living Trusts

Everyone knows that they need a will, but they don’t always understand what a trust is either. So, which one do I actually need, and do I need one?

Well, the question is—a good lawyer answer is—maybe. Everyone needs at least a will. A will will dictate where your stuff goes. Otherwise, the state decides where your stuff goes. And it doesn’t go to the state; it’s just that they have a plan, and it’s probably not the plan you would want. A revocable trust is really a substitute for a will. It is a way to plan your assets and move your assets without having to go to court.

Trust Taxation Q&A

Q: Are estates and trusts taxed as part of the grantor or as separate entities?
A: Estates and non-grantor trusts operate as separate taxable entities from the decedent or grantor for federal income tax purposes under Subchapter J of the Internal Revenue Code. Income generated by the entity is generally taxed only once, either to the trust/estate or passed through to the beneficiary if distributed during that tax year.

Q: What is the difference between grantor and non-grantor trusts for tax purposes?
A: In a grantor trust, the creator retains specific controls or powers, meaning the income is taxed directly to the grantor and reported on their individual Form 1040. In contrast, non-grantor trusts are separate entities that file a Form 1041. Non-grantor trust income is taxed at the entity level unless distributed to beneficiaries, or unless a Section 645 election treats a qualified revocable trust as part of an estate.

Q: How does the distribution of income affect taxes for beneficiaries?
A: Trusts and estates use an income distribution deduction based on their Distributable Net Income (DNI). When income is distributed to beneficiaries, it carries out the tax burden to them so they can pay taxes at their individual rates, which are often lower than top fiduciary rates. Beneficiaries report these amounts using the Schedule K-1 provided by the fiduciary.

Overview of Fiduciary Income Taxation

Navigating fiduciary income taxation is a vital part of administering estates and trusts. Estates and non-grantor trusts calculate gross income similarly to individuals, but they utilize special deductions—most notably the income distribution deduction—to avoid double taxation. While individuals typically rely on a calendar year, estates have the flexibility to select a fiscal year on their initial tax return, which can optimize timing for income and deductions.

Tax brackets for estates and trusts compress quickly compared to individual brackets. For the 2026 tax year, the federal income tax brackets for estates and non-grantor trusts are structured as follows: 10% on taxable income up to $3,300; 24% on taxable income over $3,300 but not over $11,700 ($330.00 plus 24% of the amount over $3,300); 35% on taxable income over $11,700 but not over $16,000 ($2,346.00 plus 35% of the amount over $11,700); and the top rate of 37% on taxable income over $16,000 ($3,851.00 plus 37% of the amount over $16,000). Once undistributed net income reaches these top thresholds, entities can face a combined federal rate including the 3.8% Net Investment Income Tax on investment-type income like interest, dividends, and certain capital gains. Executors and trustees can leverage planning tools like the 65-day rule—allowing distributions made shortly after year-end to count toward the previous tax year—to strategically manage tax liability between the entity and its beneficiaries.