Here’s a planning idea that many people have never heard about, but that can make a big difference over time.
It involves something called a non-grantor trust. If you have one, then read on. If you don’t, you may still be interested in a comparision of the state income tax rates in the section below.
A non-grantor trust is simply a trust that is treated as its own taxpayer (if you have a living trust or revocable trust, it is likely a “grantor” trust and this does not apply to you). With non-grantor trusts, instead of the person who created the trust paying the income tax, the trust itself pays the tax on the income it earns. Because of that, the state where the trust is considered to be located can matter a lot.
And that leads to an opportunity many trusts miss: reducing or even eliminating unnecessary state income tax.
When a trust pays state income tax every year, that tax reduces the investment return. Over time, even a small difference in taxes can have a big impact because of compounding. This “tax drag” can quietly shrink the long-term value of a trust. When that tax can be reduced—or avoided—the assets inside the trust may grow much faster.
Many people don’t realize that where a trust is located, and who is involved with it, can determine whether a state taxes the trust. Different states use different rules. A trust might be taxed based on where the person who created it lived, where the trustee lives, where beneficiaries live, or where the trust is administered. Because of this, simply naming a “no-tax state” is not always enough. The details matter.
Recent tax law changes also increased the federal deduction for state and local taxes to $40,000 starting in 2025, although that benefit begins to phase out at higher income levels. Because non-grantor trusts are treated as separate taxpayers, this change may create additional planning opportunities in certain situations.
Over the past year, several states slightly lowered their top income tax rates, but the reductions were generally small and didn’t significantly change the overall planning landscape. At the same time, some states are considering higher taxes, which means the rules may continue to evolve.
Because of all this, it’s important to review both new and existing trusts. In some cases, taxes can be reduced by changing trustees, moving the trust to another state, modifying the trust terms, or using other legal tools.
A Note for My Michigan Clients About Income Tax In Other States
I’ve attached a chart showing the highest effective state income tax rate for each state (these rate are for individuals and trusts). Several states are over 10% with (you guessed it) California highest at a top effective rate of 13.3%, while Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming are tied for the lowest at 0%. If you are thinking about moving—whether for retirement, a second home, or a permanent relocation—it’s worth taking a look.
As you can see, state income taxes vary widely. Over time, that difference can affect retirement income, investment growth, and certain trust planning strategies.
Taxes shouldn’t be the only factor when deciding where to live, but they are an important one. Before making a move, it’s wise to understand how the state you’re considering may tax your income, your investments, and possibly your trusts.
