Why Complex Trusts Matter for High-Net-Worth Investors Under OBBB

A provision in the One Big Beautiful Bill (OBBB) Act has renewed interest in a once-overlooked planning strategy: the use of a complex trust as a standalone tax-paying entity. While the concept is not new, recent updates including expanded deductions for real estate taxes make the structure more practical and more compelling, particularly for high earners with significant investment income.

The idea is straightforward. By moving income-generating assets into a complex trust established in a state with no income tax, individuals may reduce or eliminate state-level tax exposure while capturing deductions that might otherwise be phased out on a personal return. The strategy may also allow taxpayers to preserve the full standard deduction on their individual return while itemizing within the trust, effectively garnering the benefit of both.

This approach may be especially useful in high-tax states such as Massachusetts, where the combined income tax rate for high earners can reach nine percent. But the planning opportunity extends nationwide, offering a structured path to more efficient tax treatment for individuals seeking to retain more of their investment income.

How the Strategy Works

A complex trust is a distinct legal entity with its own taxpayer identification number and filing obligations. Unlike a grantor trust, where income flows through to the individual’s return, a complex trust pays its own tax. For high earners, that distinction opens the door to targeted tax planning, especially when paired with OBBB’s expanded deductions and the flexibility to choose a favorable state jurisdiction.

That said, the trust must be structured carefully. To qualify as a separate taxpayer, it must have an independent trustee and be irrevocable. Assets typically include marketable securities, rental properties and, in some cases, legacy real estate holdings with significant property tax liabilities. The trust reports its income, claims its deductions, and pays its own taxes—often at the highest marginal rate. On its own, that may seem inefficient. But for individuals already subject to the 37 percent federal bracket, the calculus changes.

State taxes become the differentiator. By locating the trust in a state with no income tax, the taxpayer may bypass obligations in states like California or Massachusetts, where high earners face a steep effective rate. The savings can be material. For a trust generating $100,000 in income, avoiding a nine percent state tax could preserve $9,000 annually.

Benefits multiply when accounting for deductions that are phased out or limited on individual returns. Under OBBB, the cap on deductible real estate taxes has increased from $10,000 to $40,000. But that expanded benefit begins to phase out at higher income levels, meaning many taxpayers see little change. Complex trusts are not subject to the same phaseout rules. When real estate is held in trust, the full deduction may be taken, potentially justifying the administrative cost of maintaining the structure.

When the Numbers Add Up

The case for using a complex trust strengthens when layering in other common deductions. Charitable contributions, mortgage interest, and real estate taxes are often limited on individual returns—either by income thresholds, itemization requirements, or ceilings introduced under OBBB. When these deductions are shifted into a complex trust, they may become fully available and more valuable.

For example, under current rules, an individual must itemize to deduct charitable contributions. Doing so often means forfeiting the standard deduction, now $30,000 for married filers. That tradeoff makes sense only if itemized deductions exceed the threshold. A complex trust sidesteps this calculation entirely. It may itemize freely without disqualifying the individual from claiming the standard deduction on their own return. The result is a more complete use of available deductions across both entities.

Charitable planning also becomes more flexible. While individuals are generally limited to deducting no more than 60 percent of adjusted gross income for charitable gifts, complex trusts may deduct up to 100 percent of their gross income. This makes the trust structure a useful option for those making large or recurring charitable contributions—particularly in years when investment income spikes.

Existing grantor trusts may be candidates for conversion. Many high-net-worth individuals already have irrevocable trusts in place for estate planning purposes, including spousal lifetime access trusts (SLATs). These may be revised or restructured to qualify as complex trusts, provided the necessary fiduciary and administrative requirements are met. The result is a single structure that addresses both estate and income tax objectives, without requiring a wholesale redesign of the taxpayer’s financial architecture.

As always, successful execution depends on coordination. Establishing a trust requires legal guidance, ongoing tax compliance, and oversight by a qualified trustee. But when the income profile, asset mix, and charitable intent are aligned, the structure can provide lasting tax benefits—particularly in high-tax jurisdictions where marginal savings compound quickly.

How We Help

AAFCPAs works with high-net-worth individuals and families to design trust and estate strategies that align with personal, philanthropic, and tax planning goals. Our professionals evaluate each client’s asset mix, income profile, and charitable intent to determine whether a complex trust structure may enhance tax efficiency under current law. We provide guidance on trust design, coordinate with legal counsel, and advise on the ongoing tax compliance requirements that accompany a separate tax-paying entity.

Our work is highly collaborative. We draw on the combined knowledge of CPAs, wealth advisors at AAF Wealth Management, and in-house consulting tax attorneys to deliver integrated solutions. Whether planning for generational wealth transfer, charitable giving, or exposure to high state income taxes, our team brings a coordinated approach that accounts for both current and long-term objectives.

These insights were contributed by Joshua England, LLM, Esq., Partner & Tax Attorney and Daniel Seaman, CPA, Tax Partner, AAF Wealth Management.

Questions? Reach out to our authors directly or your AAFCPAs partner. AAFCPAs offers a wealth of resources on strategic tax planning and wealth preservation. 

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