Trust Planning and Taxes in 2026: GRATs, SLATs, Dynasty Trusts, and Grantor Trust Status

Two numbers drive most trust decisions in 2026. The federal estate, gift, and generation-skipping transfer (GST) exemption is $15 million per person, made permanent by the 2025 tax law and indexed for inflation from 2027. And an irrevocable trust that keeps its income pays the 37% rate once its taxable income passes $16,000, a bracket a single person does not reach until $640,600. The first number means most families will never owe federal estate tax. The second means that for the families who still build irrevocable trusts, who pays the income tax matters as much as the estate tax the trust is meant to avoid.

This guide covers trust taxation and the main vehicles used by families above, or heading toward, the exemption: grantor trusts and sales to them, grantor retained annuity trusts (GRATs), spousal lifetime access trusts (SLATs), and dynasty trusts. Wills, revocable living trusts, probate costs, and beneficiary forms are in our estate planning guide. The wider household plan for $1 million to $30 million of wealth, including a shorter GRAT section, is in our high net worth planning guide. Charitable remainder and lead trusts are covered in the philanthropy guide, and creditor protection in the asset protection guide.

Revocable and irrevocable trusts

A revocable trust saves no estate or income tax. It exists for probate and incapacity, and the estate planning guide covers it. Everything below concerns irrevocable trusts.

How trust income is taxed in 2026

An irrevocable trust is either a grantor trust or a non-grantor trust, and the difference decides who writes the check to the IRS.

A grantor trust is one in which the creator keeps a power or interest listed in Sections 671 to 679 of the tax code, such as the power to swap assets of equal value or to borrow without adequate security. For income tax the trust is ignored: its income, gains, and deductions go on the creator's return. For estate tax, a well-drafted grantor trust is still outside the creator's estate. Planners call this an intentionally defective grantor trust, or IDGT. Three rulings make it useful:

• Paying the trust's income tax is not a gift to the beneficiaries, and a clause allowing (but not requiring) the trustee to reimburse the grantor does not by itself pull the trust into the estate (Rev. Rul. 2004-64).
• Because the grantor and the trust are the same taxpayer, selling assets to the trust for a note is not a taxable sale (Rev. Rul. 85-13), and interest paid on the note is not taxable income to the grantor.
• Assets in a grantor trust that is outside the estate do not get a new basis at the grantor's death (Rev. Rul. 2023-2).

A non-grantor trust is its own taxpayer. It gets a deduction for income it distributes, and the beneficiaries pay tax on that income at their own rates. Income it keeps is taxed on these 2026 brackets from Rev. Proc. 2025-32:

Long-term capital gains and qualified dividends kept in a trust are taxed at 0% up to $3,300, 15% up to $16,250, and 20% above that. The 3.8% net investment income tax applies to a trust's undistributed investment income above $16,000, the point where its top bracket starts. For individuals, that tax starts at $200,000 of income (single) or $250,000 (joint).

Illustration: a non-grantor trust earns $50,000 of taxable interest in 2026 and keeps all of it. After the $100 exemption for a trust that may accumulate income, the income tax is $16,394, and the net investment income tax adds $1,292, for $17,686 in total, or 35.4% of the income. If the trustee instead distributed the $50,000 to a beneficiary whose other income keeps them in the 22% bracket, the tax would be about $11,000, or $6,686 less. The trade-off is that distributed money is out of the trust's protection and in the beneficiary's hands.

That gap is why many trusts are drafted as grantor trusts while the creator is alive, and why trustees of non-grantor trusts often time distributions around the compressed brackets. State income tax on trusts varies widely and depends on where the trustee, the beneficiaries, and the creator live; some families choose a trustee in a state without income tax partly for that reason.

GRATs: moving growth above the 7520 rate

A grantor retained annuity trust pays the creator a fixed annuity for a set term, usually two to ten years. Whatever is left at the end passes to the beneficiaries, often children or a trust for them. The taxable gift is the starting value minus the present value of the annuity, calculated with the Section 7520 rate for the month the GRAT is funded, 5.6% for October 2026 under Rev. Rul. 2026-19.

Most GRATs are "zeroed out": the annuity is set so its present value equals the starting value, and the gift is close to zero. The Tax Court accepted this in Walton v. Commissioner (2000), and the Section 2702 regulations were later revised to follow it. Proposals to require a 10-year minimum term have appeared in past federal budgets, but none has been enacted as of September 2026.

Illustration (the same one used in our high net worth guide): $5 million of stock in a two-year zeroed-out GRAT at 5.6%. The annuity is $2,711,907 a year.

A GRAT that underperforms costs mainly the legal and valuation fees, which is why families with volatile assets often run a series of short GRATs, putting each annuity payment into a new one. A strong year in one GRAT is then not cancelled out by a weak year in the same trust.

Mortality risk

If the grantor dies during the term, the Section 2036 regulations include in the estate the amount of trust assets needed to produce the annuity forever at the 7520 rate in effect at death, capped at the trust's value. For the two-year GRAT above that amount is $2,711,907 divided by 5.6%, or about $48.4 million, far more than the trust holds, so the whole trust would be included. Even a 10-year zeroed-out GRAT of $5 million at 5.6% has an annuity of about $666,524, which implies about $11.9 million: again the whole trust. In practice, dying during the term undoes the GRAT. That is the main reason terms are kept short for older grantors.

GRATs and grandchildren

GST exemption cannot be allocated to a GRAT until its term ends, because the assets could be pulled back into the estate until then (Section 2642(f), the "estate tax inclusion period"). By then the remainder may have grown, so GST exemption is used inefficiently. GRATs are therefore usually aimed at children. For grandchildren and later generations, families more often use gifts or sales to a dynasty trust, where exemption can be allocated at the start.

Selling assets to a grantor trust

A sale to an IDGT is the usual alternative to a GRAT. The grantor sells an asset to the trust for a promissory note bearing at least the applicable federal rate (AFR). Because the trust is a grantor trust, there is no capital gain on the sale and no income tax on the interest. Growth above the note's interest rate stays in the trust, outside the estate.

The hurdle is lower than a GRAT's: the mid-term AFR, which applies to notes of more than three and up to nine years, was 4.61% for October 2026 in Rev. Rul. 2026-19, against a 7520 rate of 5.6%. Many planners first give the trust seed money, often around 10% of the sale price, so that it has assets of its own behind the note. No statute sets that percentage. The seed gift uses exemption, and GST exemption can be allocated to it at once, which suits dynasty trusts.

Illustration: a grantor gives a trust $500,000 and sells it $5 million of assets for a nine-year interest-only note at 4.61%, so the trust pays $230,500 a year and repays the $5 million at the end.

Growth below the note rate eats into the seed gift, and unlike a failed GRAT, that seed gift has already used exemption. Sales also carry valuation risk: if the IRS later values a closely held business higher than the sale price, part of the transfer becomes a gift. Formula clauses and a qualified appraisal are the usual defenses. For how appraisers value private companies, see our business valuation guide.

The note is still in the grantor's estate at death, and the trust's assets keep their original basis (Rev. Rul. 2023-2). If the grantor dies holding a note on a low-basis asset, the heirs can end up with more income tax than under a plain bequest, unless the grantor used a swap power before death to put high-basis assets such as cash into the trust in exchange for the low-basis ones.

SLATs: using one spouse's exemption

A spousal lifetime access trust is an irrevocable trust created by one spouse for the other (and usually the children). The creating spouse uses their own exemption, the assets leave both spouses' estates, and the household keeps indirect access through distributions to the beneficiary spouse. Most SLATs are grantor trusts, so the creating spouse also pays the income tax.

The risks are specific:

• Divorce. The ex-spouse stays the beneficiary unless the trust says otherwise. For divorce or separation agreements signed after 2018, Section 682 no longer shifts the trust's income tax to the ex-spouse, so the creator can keep paying tax on income the ex-spouse receives. Whether the spousal unity rule in Section 672(e) should stop applying after a divorce is unsettled; the IRS said in 2018 it would address it, and the New York City Bar asked for a fix again in December 2025.
• Death of the beneficiary spouse. The indirect access ends with that spouse's life. Some couples buy life insurance on the beneficiary spouse for this reason.
• Reciprocal trusts. If each spouse creates a similar trust for the other at about the same time, the IRS can "uncross" them and include each trust in the creator's estate, the doctrine the Supreme Court applied in United States v. Estate of Grace (1969). Couples who want two SLATs usually make them differ in timing, amounts, beneficiaries, and powers.
• Community property. In community property states, spouses usually need to split assets into separate property first, so the creating spouse is actually giving their own property.

Dynasty trusts and the GST tax

The generation-skipping transfer tax is a separate 40% tax on transfers to grandchildren and more remote descendants, directly or through trusts. Each person has a GST exemption of $15 million in 2026 (Rev. Proc. 2025-32). A dynasty trust is funded with gifts or bequests covered by that exemption, and it is drafted to last for several generations, so the assets are not subject to estate or GST tax as each generation dies.

How long a trust may last depends on the state's rule against perpetuities. South Dakota abolished the rule in 1983, Nevada allows trusts of up to 365 years, and Wyoming 1,000 years, according to a state-by-state summary from Alper Law; states that still follow the uniform statutory rule, such as California, end trusts after about 90 years. Check the current statute before choosing a state, because sources disagree and several states changed their rules in the 2020s.

A dynasty trust is often a grantor trust while the creator is alive, so the creator's income tax payments add to its growth. After the creator dies it becomes a non-grantor trust and faces the compressed brackets described above, which affects how later trustees invest and distribute.

Other irrevocable trusts in brief

• Irrevocable life insurance trust (ILIT). The trust owns a policy, so the death benefit is outside the insured's estate. Transferring an existing policy brings it back into the estate if the insured dies within three years (Section 2035); having the trust buy a new policy avoids that. With a $15 million exemption, many couples no longer need an ILIT for federal estate tax, though it can still provide cash for state estate taxes or an illiquid business.
• Charitable remainder and lead trusts. These split an asset between the family and a charity and have their own tax rules. See the philanthropy guide.
• Trusts for business owners. Families passing a company to the next generation often combine a sale to a grantor trust with a succession plan; see our business succession guide and, for employee buyers, the ESOP guide.

Funding and administration mistakes

The documents do nothing until the trust holds the assets. For irrevocable trusts, the common failures are more specific than a missing deed:

• Missing the annuity payment date on a GRAT, or paying it with a note, which the Section 2702 regulations do not allow.
• Selling to a trust with no seed money or a note that is not paid on schedule, which invites the IRS to argue that the sale was really a gift with a retained interest.
• Not filing a gift tax return (Form 709). A return with adequate disclosure starts the three-year period for the IRS to challenge a valuation, and it is also how GST exemption is allocated.
• Mixing trust money with personal money, or a trustee who follows the grantor's wishes without reading the trust, both of which help a creditor or the IRS argue the trust is a sham.
• Letting a grantor trust run for decades without a plan to turn off grantor status if the income tax becomes a burden. Many trusts let the grantor release the power that makes it a grantor trust.

Who should not bother

A couple with $8 million will not owe federal estate tax under current law, and complex irrevocable trusts would cost them control, income tax flexibility, and the basis step-up at death. They may still face a state estate tax: 12 states and Washington, D.C. have one, some with exemptions as low as $1 million (see the estate planning guide). For them, a revocable trust, correct beneficiary forms, and perhaps a state-focused plan usually matter more than GRATs or dynasty trusts. The vehicles above are for estates above, or likely to grow above, the federal exemption, or for owners of a fast-growing business who want future growth to land outside the estate.

Steps

1. Project your estate at death under current law, including growth, and compare it with the $15 million exemption per person and any state exemption.
2. List the assets likely to grow fastest. Those are the candidates for a GRAT or a sale to a grantor trust.
3. Decide who should pay the income tax on each trust, and whether you can afford it for decades.
4. For married couples considering SLATs, discuss divorce and early death openly, and review any prenuptial agreement with the trust.
5. Choose a trustee and a state with the trust's lifespan, income tax, and administration costs in mind.
6. Get qualified appraisals for anything other than cash or listed securities, and file Form 709 with adequate disclosure.
7. Review each trust every few years and when the law changes. An adviser who acts as a fiduciary should coordinate with the estate attorney and CPA.

This guide is for informational purposes only and does not constitute tax, legal, or investment advice. Tax figures are as of September 2026, and the worked examples are illustrations, not forecasts. Trust law varies by state, and the rules above can change. Work with an estate planning attorney licensed in your state and a CPA before creating or changing any trust.