The passage of the One Big Beautiful Bill Act (OBBBA) increased the 2026 lifetime gift and estate tax exemption to $15 million for an individual and $30 million for a married couple, creating a potential opportunity for individuals or couples looking to further optimize their taxes.
“Even if you expect that the value of your estate will not come close to exceeding this historically high exemption amount at the time of your passing, it may make sense to use of a portion of the exemption now in an effort to help lower your exposure to income taxes in the present,” says Kathryn Windsor, a member of the Advanced Planning Team at Fidelity Investments.
What is a non-grantor trust?
A non-grantor trust is an irrevocable trust in which the person who places assets into the trust (the grantor) maintains no control over the assets. The transfer of assets to the trust is considered a completed gift for tax purposes. The trust is a separate taxable entity, distinct from the grantor, and the transferred assets are owned by the trust. The trust itself (or its beneficiaries, depending on how it is set up) is responsible for paying any tax on income earned by the assets held within it.
By gifting assets to a non-grantor trust during your lifetime, you may be able to take advantage of rules, exemptions, and deductions that could lower your family’s combined income tax burden over the long term. It’s important to understand, however, that once established, non-grantor trusts cannot be revoked, that the grantor cannot act as trustee, and that the beneficiaries of the trust cannot easily be changed. The trust will also have ongoing legal and accounting fees, as it will need to prepare its own tax returns.
Here are 3 ways you may be able to use a non-grantor trust to help lower your income taxes.
1. Gifting income-generating assets
If you’re holding income-generating assets that you don’t expect to need in the future and that you intend to pass on to your beneficiaries, you may want to consider placing such assets in a non-grantor trust. Doing so may allow you to reduce your overall income tax burden in the present without endangering your long-term wealth transfer plans.
“If you’re in a position where you’re earning enough income to put you into the highest tax bracket, you may be looking for an opportunity to reduce any additional tax exposure that these income-generating assets might create,” says Windsor.
Were you to place these assets in a non-grantor trust for the benefit of your descendants, Windsor says, you as an individual would no longer be responsible for paying the tax on the income from the assets; instead, the trust or the beneficiaries themselves would. At first glance, this doesn’t seem especially advantageous, as the income tax brackets for trusts are more compressed than those for individuals—that is, a trust reaches the highest tax bracket faster, with less income. However, this can be remedied provided that all income generated by the assets in the trust is distributed annually to the beneficiaries.
“If the income is distributed,” says Windsor, “the trust doesn’t usually pay the taxes on it—the beneficiaries do. And assuming those beneficiaries are in a lower tax bracket than you are, your family will be paying less in income taxes overall on the same assets than if you had held onto them until you passed away.”
While this can be an advantageous strategy, Windsor offers a caveat: “By gifting an asset to a non-grantor trust now rather than holding onto it until death, you will be forgoing a potential step-up in the cost basis of those assets that could benefit your inheritors in the future.” This means that if the asset transferred to the non-grantor trust were to be sold later on, it could result in significant capital gains taxes that otherwise may have been reduced had the grantor retained the asset, allowing its cost basis to be increased (“stepped up”) upon the grantor’s death.
Windsor notes that because of this, low-basis assets may not be the best candidates for this strategy.
2. Gifting qualified small-business stock (QSBS)
Depending on the date shares were acquired, investors who hold qualified small-business stock (QSBS) may be allowed to exclude up to the greater of 10 times their basis in the shares or $10 million (the greater of 10 times their basis in the shares or $15 million for QSBS acquired after July 4, 2025) from their long-term capital gains. This significant benefit can be made even more powerful with some savvy planning.
“The QSBS exclusion is per-taxpayer,” says Windsor. “Gifting qualified small-business stock to multiple non-grantor trusts could allow you to maximize this benefit, as each trust could potentially claim the exclusion.” This would not work with grantor trusts, as the grantor is treated as the taxpayer and would only be allowed one exclusion. As the law is still developing in this area, however, investors should consult with their tax advisors regarding the availability of this strategy.
For stock acquired after July 4, 2025, Windsor notes that the QSBS must be held for at least 5 years in order to claim 100% of the exclusion amount. However, it is possible to claim a partial exclusion of 50% after 3 years and 75% after 4 years with the passing of the OBBBA. Stock acquired July 4, 2025, or earlier allows for different percentages of the exclusion based on when the stock was acquired. (Note that availability of the exclusion depends on a variety of factors, and investors must consult with their tax advisors concerning eligibility.)
3. Maximizing the SALT deduction
Similar to the strategy for qualified small-business stock, it may be possible to use multiple non-grantor trusts to maximize your ability to take advantage of the state and local tax (SALT) deduction—which allows for a deduction of $40,000 per taxpayer—by dividing ownership of a property equally among them. However, this would only be effective if the trusts also held other income-generating assets that the SALT deduction would be used to offset.
(This strategy requires careful structuring to avoid being consolidated by the IRS. Under IRC Section 643(f), the IRS can treat multiple trusts as a single entity if they have the same grantor and primary beneficiaries with the principal purpose of tax avoidance.)
Learn more: Using trusts to help maximize your SALT deduction.
Put simply, if an investor’s income subjects them to phaseout of the SALT deduction, transferring sufficient income-producing assets to even one non-grantor trust could reduce the investor’s income enough for them to take full advantage of the deduction. An investor could potentially use this strategy to qualify for other income tax breaks subject to income phaseouts, as well.
What to consider before establishing a non-grantor trust
While these strategies may be helpful in the right circumstances, Windsor cautions that you should be careful when determining whether or not to pursue them. Consultation with a tax advisor regarding the availability and/or advisability of a strategy under your particular circumstances is key. “It’s important to remember that when you gift assets to a non-grantor trust, it’s an irrevocable gift,” says Windsor. “You’re ceding ownership and control of the assets permanently.”
“There are also the administrative costs involved to consider,” says Windsor. “Setting up an irrevocable non-grantor trust can be costly, and you may need to engage with a corporate trustee or trust company to manage it. The cost may outweigh the savings if you aren’t careful.”
Consideration should also be given to the jurisdiction in which the trust is established and the state tax laws of that jurisdiction.
Lastly, Windsor notes that, for those who intend to use multiple non-grantor trusts in the hopes of taking advantage of these tax benefits, it’s important to ensure that these trusts are distinct enough from one another to warrant being separate trusts. “Each of your trusts should have a different primary beneficiary or some separate, non-tax purpose; otherwise, the IRS might decide that they actually constitute a single trust and aggregate them—potentially reducing their effectiveness.”