Adviser Marilyn Bergen in Portland, Ore., said she thinks both strategies can work.
Under the new federal tax regime, for example, Oregonians with trusts could end up paying 53.3% tax on trust income once state taxes are added, she said. Last week, Ms. Bergen and an attorney gave a talk on this issue to a local chapter of financial planners.
"Even in states where there is no state income tax, the rules have changed enough that trustees and advisers should take another look at how trusts should be managed," said Ms. Bergen, a financial planner at Confluence Wealth Management LLC, with $390 million under management.
Indeed, with the enactment of the American Taxpayer Relief Act of 2012, trusts now face higher tax liabilities. Trusts with more than $11,950 in income 2013 must pay the top tax rates for income, dividends and capital gains. In contrast, individual taxpayers don't trigger those rates until they report more than $400,000 in taxable income ($450,000 for joint filers). The top income-tax bracket is 39.6%, while the top rate for long-term capital gains and dividends is now 20%.
An obvious place to start to reduce taxes in a trust is to look at the investments it holds.
Advisers say trustees should consider alternatives to dividend-paying stocks and other highly taxed securities--such as emerging-market debt funds, REIT mutual funds and international bond funds.
As replacement options, trust owners may want to consider insurance products and private placements, which are non-public offerings of company shares, said attorney Diana Zeydel, of Greenberg Traurig. She chairs the Miami law firm's trusts and estate department.
And as always, savvy trustees will continue to work hard to balance capital gains and losses to reduce the net tax burden, said attorney Michael Puzo, chair of the private client group at Hemenway & Barnes LLP in Boston. "Here, the 3.8% surtax adds nothing conceptually, just makes the stakes higher than they were before," he said.
One widely used method to limit a trust's tax liabilities is to bunch capital gains into a given year to avoid hitting the top bracket in the next year.
If removing some investments from a trust isn't an option, trust beneficiaries can help reduce the tax hit.
The beneficiary is taxed, not the trust, when he or she gets a distribution. So it may be possible to lower overall taxes by paying out more to a beneficiary who's in a lower tax bracket.
Recently, a widow in her mid-70s sat down with North Carolina adviser David Blain to talk about a trust she has that holds about $650,000 in exchange-traded funds. It pays her expenses from the $21,000 or so that it earns in interest and dividends. The woman is in the 25% tax bracket.
Until now, the trust has not paid out principal. After talking with Mr. Blain, though, the woman decided the trust should pay 5% of its principal to her each year. Her son, who will inherit whatever is left in the trust at her death, was part of this conversation.
However, a delicate balance has to be struck with this kind of adjustment.
"The danger with this is, we want to lower taxes so as to give as much income as possible to a kid, but the grandkids may be saying, 'Wait, that's coming to me, don't give it all to her,'" said Mr. Blain, a financial planner in New Bern, N.C., whose eponymous firm has around $70 million under management.
While changing the investments in the trust or paying a trust beneficiary bigger distributions may help cut tax liabilities, some trusts simply can't be touched.
It "may be impossible, if the trust is very rigid," said attorney Edward F. Koren, of Holland & Knight in Tampa, Fla., and chair of its private wealth services. A trustee can't make changes to a trust unless the documents expressly permit it, he said.
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