- Trusts can invest in QOFs — grantor trusts flow the OZ benefit to the grantor; non-grantor trusts hold the QOF interest and claim the benefit at the entity level

- Non-grantor trusts can elect to start the 180-day window on the last day of the trust's tax year, creating the same planning flexibility available to partnerships

- Distributing a QOF interest from a non-grantor trust to a beneficiary is an inclusion event that triggers the deferred gain — gifting from a non-grantor trust has the same effect

- State conformity matters: Texas has no state income tax (most favorable), California and New York do not conform to federal OZ rules

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Trusts are often the most sophisticated and least discussed investor category in the Opportunity Zone space. Many trustees and their advisors assume that trusts either cannot access OZ benefits or that the complexity makes participation impractical. Neither assumption is correct. Trusts can invest in Qualified Opportunity Funds (QOFs), the mechanics work differently than individual investing, and the analysis requires careful coordination between the trustee, the trust's tax counsel, and the QOF sponsor.

This guide addresses the practical and technical questions trustees face when evaluating OZ investments.

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## Can Trusts Invest in QOFs?

Yes. The IRS has confirmed that trusts and estates can invest eligible capital gains into QOFs. The Treasury regulations do not limit QOF investors to individuals — they specifically include trusts, estates, partnerships, S corporations, and C corporations as eligible investors.

The key requirement is that the investor has recognized capital gains eligible for deferral. For a trust, this means the trust itself must have recognized a capital gain — not the grantor, and not the beneficiaries — unless the trust is treated as a pass-through under applicable tax rules.

The type of trust matters significantly, as the tax treatment of gains and the 180-day window depend on how the trust is classified.

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## Which Trusts Qualify?

The relevant distinction is between **grantor trusts** and **non-grantor trusts**:

### Grantor Trusts

A grantor trust is one in which the grantor (the person who created and funded the trust) is treated as the owner for federal income tax purposes. Common examples include:

- Revocable living trusts (during the grantor's lifetime)

- Intentionally Defective Grantor Trusts (IDGTs)

- Grantor Retained Annuity Trusts (GRATs) in some circumstances

Because the grantor is taxed on trust income, capital gains recognized inside a grantor trust are treated as the grantor's gains. The grantor — not the trust — would invest those gains into a QOF to capture the OZ benefits. The grantor's 180-day window applies.

**Note:** Most irrevocable trusts designed for asset protection or estate planning purposes (IDGTs, SLATs, QPRTs) are grantor trusts. The "irrevocable" label describes the trust's structure, not its tax classification. An irrevocable grantor trust still flows its tax attributes to the grantor.

### Non-Grantor Irrevocable Trusts

A non-grantor trust is a separate taxpaying entity — it files its own tax return (Form 1041), has its own tax brackets, and pays its own capital gains taxes. Common examples include:

- Irrevocable trusts designed to move assets out of the grantor's estate post-death

- Complex trusts that accumulate income

- Charitable Remainder Trusts (specific analysis required)

- Qualified Disability Trusts

For a non-grantor trust, the trust itself recognizes the capital gain and can invest in a QOF directly. The trust entity makes the QOF investment, and the OZ benefits accrue at the trust level.

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## How the 180-Day Rule Applies to Trusts

The 180-day window mechanics depend on the trust type:

### For Non-Grantor Trusts

The trust must invest its eligible capital gain into a QOF within 180 days of the date the gain was recognized. The trust — not the beneficiary — is the taxpayer and the QOF investor.

**Special rule for trusts:** Treasury Regulation §1.1400Z2(a)-1(b) provides that a trust may elect to start the 180-day period on the last day of the trust's tax year (typically December 31) rather than on the date of the triggering transaction. This election mirrors the rule available to partnerships. For a trust that recognized a gain in April 2025, the 180-day window can be measured from December 31, 2025 — giving the trustee until approximately June 28, 2026 to invest.

### For Grantor Trusts

The grantor is the taxpayer, so the 180-day window runs from the date the gain was recognized by the trust (which flows to the grantor). The grantor invests in the QOF personally, not the trust. However, if the trust itself is the QOF investor on behalf of the grantor, the timing must align with the grantor's 180-day clock.

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## Trust vs. Individual OZ Investing: Key Differences

| Factor | Individual Investor | Non-Grantor Trust |

|---|---|---|

| Who recognizes the gain | Individual | Trust entity |

| Who invests in the QOF | Individual | Trustee on behalf of trust |

| 180-day window start | Date of sale | Date of sale OR year-end election |

| Tax on deferred gain (Dec 31, 2026) | Individual's return | Trust's Form 1041 |

| 10-year exclusion | Individual's QOF interest | Trust's QOF interest |

| Distribution of QOF interest to beneficiaries | N/A | Possible inclusion event (see below) |

| State tax conformity | Varies by state | Varies by state; situs matters |

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## Fiduciary Considerations for Trustees

Investing trust assets in a QOF is not simply a tax optimization exercise — it is a fiduciary decision. Trustees must evaluate OZ investments against their duty of prudent investment under the Uniform Prudent Investor Act (or applicable state law) and the terms of the trust instrument.

**Key fiduciary questions:**

**1. Does the trust instrument permit illiquid, long-term investments?**

A QOF investment is typically a 10-year hold with limited liquidity. Many trust instruments require a balance between income-producing assets and growth assets. A trustee who allocates a large portion of trust assets to a single illiquid fund may face challenge from beneficiaries, particularly income beneficiaries who receive trust distributions.

**2. What is the trust's distribution obligation?**

If the trust must distribute income annually to current beneficiaries, a QOF that generates minimal current income (common in development-phase real estate) may not serve the trust's distributional needs. Trustees should model the distribution impact before committing.

**3. Who benefits from the 10-year exclusion?**

Under a typical non-grantor trust, the 10-year capital gains exclusion benefits the trust as the entity — but the value flows to whoever holds the remainder interest at the time of exit. If a QOF investment is made for the benefit of remainder beneficiaries at the expense of current income beneficiaries, that conflict should be documented and disclosed.

**4. Is the investment diversified?**

The Prudent Investor Act requires trustees to consider diversification. A single QOF investment representing a large concentration in one fund, one asset class, and one geography requires documented justification.

**5. Is the sponsor qualified?**

Trustees bear ongoing responsibility for monitoring trust investments. This means not just evaluating the QOF at entry but maintaining oversight throughout the 10-year hold. Sponsors with institutional-quality reporting and track records are more defensible choices for trustees.

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## Common Structures for Trust OZ Investing

**Structure 1: Non-Grantor Trust Invests Directly**

The most straightforward path. The trust recognizes a gain, the trustee elects to invest in a QOF, and the trust holds the QOF interest for 10 years. The 10-year exclusion applies at the trust level. Best suited for trusts with accumulation intent rather than current distribution requirements.

**Structure 2: Distribution of Gain to Beneficiaries**

A trust that distributes capital gains to beneficiaries passes the tax liability along with it. If the trust distributes the gain before investing in a QOF, the beneficiary — not the trust — can invest in the QOF and capture the benefit. This works cleanly when the trust instrument requires or permits gain distributions.

**Important:** If the trust has already invested in a QOF, distributing the QOF interest to a beneficiary is an inclusion event that triggers the deferred gain at the trust level. The same is true for gifting a QOF interest from a non-grantor trust — any transfer of the QOF interest out of the entity that made the deferral election triggers gain recognition.

**Structure 3: Grantor Trust with Grantor QOF Investment**

The trust recognizes a gain that flows to the grantor as the deemed owner. The grantor invests in the QOF personally. The trust may indirectly benefit if the grantor's wealth, preserved by the OZ tax benefits, is later transferred into or around the trust.

**Structure 4: Charitable Remainder Trust (CRT)**

A CRT can recognize gains on contributed assets tax-free (due to CRT's tax-exempt status) but cannot directly claim OZ benefits because it doesn't pay capital gains tax. Complex hybrid structures involving CRTs and QOFs exist but require specialized counsel and are beyond the scope of this guide.

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## Entity-Level vs. Beneficiary-Level Election

A critical structural decision for non-grantor trusts is whether the OZ deferral election is made at the trust level or the beneficiary level:

**Trust-level election:** The trust recognizes the gain, invests in the QOF, and makes the deferral election on its Form 1041. The 10-year exclusion accrues to the trust. This is the standard approach for accumulation trusts.

**Beneficiary-level election:** If the trust distributes the capital gain to beneficiaries (via the distributable net income mechanism), the beneficiaries receive the gain on their K-1s and can individually elect to invest in QOFs. Each beneficiary has their own 180-day window starting from the last day of the trust's tax year. This approach is advantageous when beneficiaries have different tax profiles or investment preferences.

The choice between entity-level and beneficiary-level election should be made before the trust's 180-day window expires. Once the trust invests in a QOF at the entity level, reversing course requires a disposition that triggers the deferred gain.

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## State Tax Conformity for Trust OZ Investments

State tax treatment of OZ investments varies significantly and is particularly important for trusts, where situs, administration, and beneficiary residence may span multiple states:

- **Texas:** No state income tax. OZ trust investments in Texas face zero state-level tax friction — making it the most favorable state for both the trust's situs and the underlying OZ investment location.

- **California:** Does not conform to federal OZ rules. California-sited trusts (or trusts with California-resident beneficiaries) owe California tax on deferred gains and do not receive the 10-year exclusion at the state level. This can materially reduce the after-tax benefit of OZ investing for California trusts.

- **New York:** Does not conform to federal OZ rules. Similar to California, New York-sited trusts owe state and potentially city tax on deferred gains regardless of federal OZ treatment.

- **Nevada, Wyoming, South Dakota:** No state income tax and favorable trust situs rules. These states are often chosen for trust domicile specifically because of their tax-friendly environment.

Trustees managing multi-state trusts should model the state tax impact before committing to a QOF investment. The federal benefit may be partially or substantially offset by state non-conformity.

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## Working with Your Tax Advisor

Given the complexity, trustees considering OZ investments should engage:

- **Trust and estate tax counsel** familiar with grantor trust rules, fiduciary duty under state law, and trust instrument interpretation

- **A QOF sponsor with experience servicing trust investors** — not all sponsors are equipped to handle trust-level subscription documents, trust tax identification, and the coordination required for trust reporting

- **State tax counsel** if the trust is domiciled in a state with OZ non-conformity or complicated trust situs rules

Savoy Equity Partners has worked with trust investors since its first OZ fund and can coordinate with your advisors on trust-level subscription and reporting requirements.

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