The Legacy and Faith Show · CRISTA Media

04/08/26 - Beneficiaries pt.2

April 8, 2026·27 min·2 clips

Paul Grant reveals why most trusts actually create a tax detriment for beneficiaries due to compressed tax rates.

1. The Legacy and Faith Show, hosted by estate and tax attorney Paul Grant with co-host Mark Holland, continues a multi-episode series on the beneficiary's perspective in estate planning, focusing this week on tax implications of inherited trusts. 2. Paul Grant is an estate and tax attorney based in Washington state; Mark Holland serves as co-host, asking clarifying questions throughout. 3. The episode's core thesis is that holding an inheritance inside a trust, when properly designed, provides tax advantages over receiving assets outright — despite the trust's compressed tax brackets appearing worse at first glance. 4. Paul explains that trusts file a separate 1041 tax return each year and are taxed as individuals, but face a compressed rate: income above approximately $13,600 is taxed at 37%, compared to the $250,000 threshold for individuals. 5. The primary tool for overcoming the compressed rate is a 'demand right' — a trust provision that gives the beneficiary the legal right to demand income distributions, which causes the IRS to attribute that income to the beneficiary's personal 1040 even if they never actually take it. 6. By having the income taxed at the beneficiary's personal rate — typically 20-25% — rather than the trust's 37%, the design achieves a meaningful annual tax savings on amounts above the $13,600 threshold. 7. Paul notes that most beneficiaries take more than the annual trust income anyway, which automatically moves the tax consequence to their personal return, making the demand-right provision relevant mainly for disciplined beneficiaries who prefer to leave assets in the trust. 8. Special needs trusts are explicitly carved out: for a beneficiary whose government program eligibility depends on limiting assets, the trust's purpose is protection, not tax efficiency, so the compressed rates are accepted as a necessary cost. 9. Paul addresses inherited IRAs held inside a trust: under current law, a non-disabled beneficiary must unwind the IRA within 10 years regardless of whether it is held in a trust or transferred outright, so the trust does not worsen the tax outcome. 10. For a $500,000 inherited IRA, Paul illustrates that the 10-year unwind means roughly $50,000 of additional income per year, which the trust can distribute to the beneficiary's 1040 or allow the trust to cover through a reimbursement provision. 11. Annuities receive separate treatment: after-tax money placed into an annuity loses its tax-free basis status, must be unwound within five years when inherited, and gains are taxed as ordinary income rather than capital gains — with no step-up in basis at death. 12. Paul criticizes leaving annuities to a beneficiary directly as producing 'bad tax consequences' and argues that routing them through a trust allows for more orderly, flexible unwinding. 13. The counterintuitive central argument is that clients who say they 'don't want to control' their beneficiaries by skipping a trust are actually imposing more control, because an outright transfer-on-death forces the beneficiary into a single mandatory course of action. 14. Paul states directly: 'If you force the beneficiary to take the IRA, you have just demanded something of the beneficiary — you have pigeonholed them — you have done exactly what you said you don't want to do.' 15. A trust, by contrast, lets the beneficiary choose whether to take distributions, leave money invested, have the trust pay the tax, pay it personally, or split the obligation — described as 'the most flexible instrument.' 16. Paul acknowledges that his trust designs differ from standard attorney practice, warning listeners not to assume other attorneys use the same demand-right structures: 'Most trusts do not operate like this.' 17. The tone is conversational and educational, with Mark Holland playing a deliberate straight-man role by asking basic clarifying questions that allow Paul to restate complex points accessibly. 18. Paul self-deprecatingly admits he wishes he could make taxes funny and acknowledges the topic is dry, which somewhat lightens the density of the technical content. 19. Best for people in or near retirement who are creating estate plans and want to understand the tax mechanics of trust-based inheritance in Washington state. 20. Likely to frustrate listeners who want actionable DIY guidance rather than a high-level conceptual overview, or those outside the Pacific Northwest where Washington state estate tax rules don't apply.

As heard by us

A steady tax-and-trust discussion that keeps purpose ahead of taxes.

This discussion keeps beneficiary planning grounded in a simple tension: tax efficiency matters, but it cannot outrank the trust's purpose or the family it is meant to protect.

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Why you'd press play

You want the tax angle without losing sight of the beneficiary the trust is meant to protect.

Read the full recommendation in PlayNext →

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