How to Leverage Trust Income in Your Estate Plan

For high-net-worth and ultra-high-net-worth individuals, effective estate planning goes far beyond simply naming beneficiaries. It involves strategically managing assets, addressing tax considerations, and structuring wealth so it can be transferred according to your goals. One powerful tool in this process is a trust. Trusts can help protect your assets and provide the structure to allow you to control how income generated from those assets is distributed, creating opportunities to  support your estate planning objectives and improve tax efficiency.

However, leveraging trust income can be complex, particularly when multiple trusts, varying types of beneficiaries, and tax considerations are involved. By taking a tailored, holistic approach, trust income can function not just as a financial tool, but as a strategic lever to help protect and grow your family legacy.

That’s where a concierge financial advisory service like Avidian Wealth Solutions comes in. We work closely with clients to design and manage estate plans that aim to align with their long-term objectives, focusing on wealth preservation, tax efficiency, and intergenerational transfer. Ready to get started? Let’s talk.

What is considered trust income?

Trust income generally refers to the earnings generated by assets held within a trust. These earnings can take various forms, including:

• Interest
• Dividends
• Capital gains
• Rental income
• Business profits

The nature of the trust — whether it is a revocable trust, irrevocable trust, or a specialized vehicle like a charitable remainder trust (CRT) — determines how income is treated and distributed.

For example, a trust holding a diversified investment portfolio may generate interest and dividends that are classified as trust income. Real estate assets may produce rental income, while business holdings might generate profits passed through to the trust. Each source of income may have different tax implications depending on the structure of the trust and whether the income is distributed to beneficiaries or retained within the trust.

Do you pay taxes on money given from a trust?

Whether you pay taxes on distributions from a trust depends on several factors, including the type of trust and the character of the income:

• For revocable trusts, income is typically taxed to the grantor, as assets in these trusts are considered part of the grantor’s estate.
• Irrevocable trusts, on the other hand, may be treated as separate taxable entities, and the trust itself could pay taxes on undistributed income.

Distributions to beneficiaries often carry tax consequences. For instance, if an irrevocable trust distributes income to a beneficiary, the recipient may be liable for income taxes on that portion. Strategic planning can, however, help mitigate the tax burden. Strategies available to you might include timing distributions to beneficiaries in lower tax brackets or utilizing specific types of trusts designed for tax efficiency.

Understanding these nuances is essential. Without careful planning, trust income can result in unintended tax consequences, reducing the overall wealth available for your heirs.

How trust income fits into estate planning

Trusts often play a central role in estate planning for high-net-worth individuals. They offer a mechanism to control not only who receives your assets, but also how and when distributions might occur. Trust income can be important, as it may provide ongoing financial support to beneficiaries and help reduce estate and gift tax consideration.

For example, a carefully structured irrevocable trust may remove certain assets from your taxable estate, while still generating income for your family. Charitable trusts may help support philanthropic goals and provide potential income and estate tax benefits . Even discretionary trusts offer flexibility that allows trustees to distribute income according to changing family circumstances or future needs.

In addition, trust income can  play a role in multi-generational planning. When distributions are designed strategically, families can maintain a sustainable flow of wealth, and beneficiaries can be supported over time without unnecessary tax erosion. Income-splitting strategies may also help manage beneficiaries’ individual tax liabilities, potentially enhancing long-term wealth transfer options.

How to distribute trust income to beneficiaries

Distributing trust income effectively requires careful planning and knowledge of the different types of trusts available. Each type of trust offers unique advantages and considerations for tax and estate planning. Some commonly used trusts include:

• Charitable Remainder Trusts (CRTs): These allow you to receive an income stream from trust assets while ultimately benefiting a charitable organization. CRTs provide significant tax advantages, such as income tax deductions and deferral of capital gains taxes.
• Intentionally Defective Grantor Trusts (IGTs): IGTs enable the grantor to pay income taxes on the trust’s earnings, effectively reducing the size of the taxable estate while keeping control of the assets.
• Irrevocable Life Insurance Trusts (ILITs): ILITs hold life insurance policies outside of your taxable estate, providing liquidity for estate taxes and ensuring that death benefits pass directly to beneficiaries.

What is the 5 by 5 rule for trusts?

The 5 by 5 rule, or more specifically, the “5 by 5 power in trust,” gives a beneficiary a limited authority to direct trust property, often allowing them to appoint up to $5,000 or 5% of trust assets annually to themselves or others. This type of power is used in irrevocable or generation-skipping trusts to provide flexibility without compromising the trust’s overall structure or tax advantages.

How an estate planning advisor can help

The relationship between trust income and estate planning is complex, particularly for individuals with high-value, diversified portfolios. An estate planning advisor or financial concierge can provide guidance across multiple fronts:

• Trust selection and structuring: Advisors can help determine which type of trust aligns with your objectives, whether it’s for tax minimization, asset protection, or charitable purposes.
• Income and distribution planning: Professionals analyze potential income flows, tax implications, and distribution strategies to ensure beneficiaries receive the maximum benefit.
• Tax optimization: Advisors can design structures that reduce income, gift, and estate tax liability, using techniques such as GRATs, IGTs, and CRTs.
• Integration with overall wealth strategy: Trusts are just one component of a broader wealth management plan. Advisors ensure your trust strategy aligns with investment portfolios, retirement plans, and philanthropic goals.

Call Avidian for advanced estate planning solutions

Leveraging trust income in your estate plan may offer significant advantages — such as tax-focused planning opportunities, controlled wealth transfer, and long-term support for family goals  — but it requires careful planning and execution. With a concierge approach, Avidian Wealth Solutions helps high-net-worth individuals navigate the intricacies of trusts, income distribution, and tax planning to create a tailored strategy designed to support both family and philanthropic goals.

Our team works closely with clients to evaluate trust structures, distribution strategies, and tax implications — all aimed to help your estate plan maximize the value of your wealth and align with your vision. Whether you are establishing a new trust, revising an existing one, or coordinating with legal and tax advisors, Avidian offers a proactive, comprehensive approach to estate planning.

Reach out to Avidian Wealth Solutions in Houston, Austin, Sugar Land, and The Woodlands to explore how trust income might enhance your estate plan. Our concierge service approach is designed to help you preserve, protect, and transfer your legacy effectively for generations to come. Schedule a conversation with an advisor today!

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