Trust Planning Pitfalls: What You Should Know

Trusts are a powerful tool in estate and tax planning, helping you maintain control over your assets while protecting the wealth you’ve worked hard to build. Understanding how trusts are taxed, properly funding them, choosing the right trustee, and avoiding common mistakes are the key to making sure the trust works according to your wishes. 

Distribution vs accumulation

One of the most important decisions you can make regarding your trust is whether income should be distributed to beneficiaries or kept within the trust. This choice matters because of distributable net income (DNI), which determines how much income can be passed through for tax purposes.

When income is distributed, beneficiaries typically pay the tax, often at lower rates. When income is retained, the trust pays tax at its own compressed brackets. Trusts reach the top rate faster, creating tax drag, or more tax being paid than necessary, which eats into long‑term growth.