How Are Trusts Taxed in South Carolina?

You’ve worked with an attorney to choose the right kind of trust, gathered necessary documentation, and breathed a deep sigh of relief, but did you know that you may need to pay taxes on income generated by the trust? It’s just one more intricacy in the opaque field of estate planning. Your residency, the location of income-generating assets, and the type of trust all factor into your tax obligations. Our estate planning attorneys in Myrtle Beach work with clients on trust matters every day, and we would be happy to help you as well.

For more information about trust taxes in SC, keep reading. And if you’d like to schedule a free consultation to discuss your options for estate planning, reach out to us.

Resident vs. Non-Resident Trusts in South Carolina

South Carolina taxes trusts based on residency; there are both resident and non-resident trusts. A resident trust in South Carolina is generally formed when the grantor lives in SC or the trust is administered in the state. Resident trusts are subject to state income tax on all income, whether generated inside or outside South Carolina. In contrast, non-resident trusts only pay South Carolina tax on income that originates from sources within the state. For more specifics, the South Carolina Department of Revenue provides guidance on how residency affects tax obligations for trusts.

Different Types of Trusts and Their Tax Rules

Each type of trust has unique tax rules. In South Carolina, revocable trusts allow grantors to retain control, but any income generated by the trust generally counts as the grantor’s personal income. These trusts are flexible and allow changes over time, but they don’t provide a separate tax identity. Instead, the grantor includes trust income on their personal tax return.

Irrevocable trusts in South Carolina work differently. Once established, the assets in an irrevocable trust are no longer considered part of the grantor’s estate, meaning they’re often shielded from the grantor’s personal tax reporting. Instead, the trust files its own tax return, paying income tax at trust tax rates on the earnings it retains. Income distributed to beneficiaries can be taxed directly to the recipients. Read the IRS’s fiduciary tax guidelines for deeper information, or speak with your CPA.

South Carolina Income Tax Rates for Trusts

South Carolina applies a progressive tax rate to trusts, similar to how individuals are taxed. The South Carolina Department of Revenue offers tables that show these rates, which apply to both resident and non-resident trusts earning income within the state. So if a rented home located in South Carolina is kept within a trust, that income must be reported.

Federal and Estate Taxes on Trusts

Federal Tax Implications for South Carolina Trusts

As you would expect, trusts are subject to federal tax rules. Irrevocable trusts, in particular, must file a separate tax return, with the IRS assessing tax at progressively higher rates than personal income. When a trust distributes income to beneficiaries, it can “pass through” that income, meaning beneficiaries report it on their own tax returns. This setup requires trustees to handle distributions carefully.

Estate Tax and Trusts in South Carolina

South Carolina does not impose an inheritance or state estate tax on trusts or individuals. Federal estate taxes however may apply to trusts, especially if they hold considerable assets.

For example, if a South Carolina trust holds $20 million in assets, and the grantor passes away, the estate would face federal estate taxes on any amount over the 2024 federal exemption of $13,610,000. As a result, it is common for heirs to sell off a portion of the inheritance (especially if it is not cash), in order to handle the tax burden.

Call Bespoke Estate Law

Don’t tackle a trust on your own when Bespoke Estate Law helps residents of South Carolina every day. Our estate planning services in Surfside Beach and the surrounding coastal areas of SC include trust formation, wills, probate, and more, and we would be happy to help you secure a brighter future for your heirs.