Leave a Brokerage Account in Trust for the Kids and in 2027 the Trust Hits the 37% Bracket at $16,500 of Income. An Heir Who Inherits It Outright Doesn’t Get There Until $661,375

A 74-year-old widower rewrote his will in 2026 with one goal. He wanted his $1 million brokerage account kept away from his two children until each turned 35. His attorney wrote a testamentary trust that told the trustee to hold the account, accumulate the income, and release principal at 35.

He died that fall. His son and daughter each earn $85,000 a year. The account is mostly bonds and money-market funds, and in 2027 it produces $40,000 of interest and nonqualified dividends.

The trustee files Form 1041, and the trust owes $13,515.20 in federal tax. If the children had inherited the account directly and split the same income, they would have owed $8,800 combined.

Trust Brackets Reach 37% at $16,500

When the grantor dies, the trust becomes its own taxpayer. Section 641(a) applies the estates-and-trusts rate table to “income accumulated or held for future distribution under the terms of the will or trust.” Section 1(j)(2)(E) sets that table, and the IRS indexes it every year.

Under Rev. Proc. 2026-35, a trust in 2027 pays 10% up to $3,400, 24% up to $12,100, 35% up to $16,500 and 37% above $16,500. A single individual pays 37% only on taxable income greater than $661,375, according to IRS News Release IR-2026-133 of Nov. 5, 2026. A trust skips the 12% and 22% brackets where most heirs live.

The net investment income tax makes the gap wider. Under Section 1411(a)(2), a trust owes 3.8% on the lesser of its undistributed net investment income or the amount by which its adjusted gross income exceeds the point where its top bracket begins. A single heir owes it only on modified adjusted gross income above $200,000 under Section 1411(b)(3).

How the 2027 Trust Bill Adds Up

The trust starts with $40,000 of income and deducts its $100 exemption under Section 642(b)(2)(A). That leaves $39,900 of taxable income, and $23,400 of it falls above $16,500.

The table charges $3,968 on the first $16,500 plus 37% of the $23,400 excess, for $12,626 of income tax. The net investment income tax adds 3.8% of the same $23,400, or $889.20. The total federal bill comes to $13,515.20.

Now take the directly path. Each child inherits half the account and $20,000 of the income. The 2027 standard deduction for single filers is $16,600, so an $85,000 salary leaves $68,400 of taxable income. Adding $20,000 brings it to $88,400. That stays inside the 22% bracket, which covers income over $52,025 up to the 24% line at $109,125.

Each child owes $4,400 on the inherited income, or $8,800 for both. Holding the income in the trust costs the family $4,715.20 in federal tax for 2027, and that cost comes back every year the trustee keeps accumulating. These figures cover federal tax only, at 2027 rates, with both children filing single.

Paying Out the Income Keeps the Trust and Cuts the Tax

The father wanted control, and the trust gives him that: a trustee standing between the children and the principal, a spendthrift clause, and protection if a child divorces. The extra tax comes from one word in the document: accumulate.

Section 661(a) lets a trust deduct income it pays out, up to distributable net income. Section 662 moves that income onto the beneficiaries’ own returns through Schedule K-1. IRS Publication 17 says “there is never a double tax,” and dividends a trust distributes are reported by the beneficiary as dividend income.

Suppose the will had told the trustee to pay out net income every year and hold the principal until 35. The $40,000 would go to the children, the trust’s deduction would wipe out its taxable income, and the family would owe the same $8,800 as on the directly path. The principal would still be locked up, which is what the father wanted. A single clause in a document can be the difference between family keeping the money and the IRS taking a third of it, which is why we put the full estate planning checklist, beneficiary forms and trust language included, in a free guide here.

Five Moves Before the Next Form 1041

1. Read the trust’s distribution clause. “Shall distribute all net income” directs the income to the heirs’ brackets. “May accumulate” leaves it in the trust’s brackets.
2. Ask the trustee for each beneficiary’s expected taxable income. A trustee who has discretion can directs more of the payouts to the children in the lowest brackets.
3. Use the 65-day election. Under Section 663(b), a trustee can treat distributions made in the first 65 days of 2028 as if they were paid on the last day of 2027.
4. Change what the trust holds. Municipal bonds and low-dividend growth stocks produce little taxable income for the trust to accumulate.
5. If you are still wrote the will, have your estate attorney compare a required income clause with the creditor protection it gives up. Both versions can be run against your actual portfolio by your CPA.

One Number Every Trust Owner Needs

The number is $16,500. In 2027, a trust that keeps its income pays 37% on everything above that amount. An heir holding the same money in their own name pays 37% only above $661,375.

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