How are trusts taxed in the US?
A non-grantor trust is a separate taxpayer that files Form 1041 and pays tax on income it retains, using highly compressed brackets. A grantor trust is disregarded — its income is reported on the grantor's personal Form 1040. Income distributed to beneficiaries is carried out and taxed to them instead.
Why are trust tax brackets called compressed?
Because they reach the top rate almost immediately. In 2024 a trust hits the top 37% federal rate at just $15,200 of retained taxable income, whereas an individual would not reach 37% until over $600,000. This encourages trustees to distribute income to beneficiaries in lower brackets.
What is distributable net income (DNI)?
DNI is the amount of trust income that can be carried out to beneficiaries. When a trust distributes income, it takes a deduction for the DNI distributed and the beneficiary reports that income on their own return, usually at a lower rate than the trust would pay.
How is this different from Canada?
Both countries push trusts toward top rates, but the mechanics differ. US non-grantor trusts use compressed federal brackets topping out at 37%, while Canadian trusts are generally taxed at the top combined marginal rate (roughly 50%+) except for a graduated rate estate. The US also has no separate estate-tax equivalent inside the income tax the way Canada uses deemed dispositions.