Do Beneficiaries Of A Trust Have To Pay Taxes?

Brad Smith • September 20, 2021

Beneficiaries of a trust typically pay taxes on the distributions they receive from the trust's income, rather than the trust itself paying the tax. However, such beneficiaries are not subject to taxes on distributions from the trust's principal.

Understanding Distributions

When a trust makes a distribution, it deducts the income distributed on its own tax return and issues the beneficiary a tax form called a K-1.


The K-1 indicates how much of the beneficiary's distribution is interest income versus principal and, thus, how much the beneficiary is required to claim as taxable income when filing taxes.

Trusts & Beneficiaries

A trust is a fiduciary relationship whereby the trustor or grantor gives another party—the trustee—the right to hold property or assets for the benefit of a third party (usually the beneficiary).


Trusts are established to provide legal protection and to safeguard assets usually done as part of estate planning. Trusts can be used to ensure the assets are properly distributed to the beneficiaries according to the wishes of the grantor.


Trusts can also help to reduce estate and inheritance taxes as well as avoid probate, which is the legal court process of distributing assets upon the death of the owner.


Although there are several types of trusts, they typically fall into one of two categories. A revocable trust can be changed or closed at any time during the grantor's lifetime.


Conversely, an irrevocable trust cannot be amended or closed once it has been opened, including those trusts that become irrevocable upon the grantor's death. The grantor—by establishing an irrevocable trust—essentially has transferred all ownership or title of the assets in the trust.


There are various tax rules for beneficiaries of income from trusts, depending on whether the trust is revocable or irrevocable—as well as the type of income received from the trust.

Understanding Interest & Principal Distributions

When trust beneficiaries receive distributions from the trust's principal balance, they do not have to pay taxes on the distribution. The Internal Revenue Service (IRS) assumes this money was already taxed before it was placed into the trust. Once money is placed into the trust, the interest it accumulates is taxable as income, either to the beneficiary or the trust itself.


The trust must pay taxes on any interest income it holds and does not distribute past year-end. Interest income the trust distributes is taxable to the beneficiary who receives it.


The amount distributed to the beneficiary is considered to be from the current-year income first, then from the accumulated principal. This is usually the original contribution plus subsequent ones and is income in excess of the amount distributed.


Capital gains from this amount may be taxable to either the trust or the beneficiary. All the amount distributed to and for the benefit of the beneficiary is taxable to him or her to the extent of the distribution deduction of the trust.

Important Forms

The two most important tax forms for trusts are the 1041 and the K-1. Form 1041 is similar to Form 1040. On this form, the trust deducts from its own taxable income any interest it distributes to beneficiaries.


At the same time, the trust issues a K-1, which breaks down the distribution, or how much of the distributed money came from principal versus interest. The K-1 is the form that lets the beneficiary know the tax liability from the trust's distributions.

Interested in Working With Us?

If you need any help regarding your business or other legal matters please reach out to us directly here and schedule a call with one of our paralegals on our scheduling page here.

Interested in Working With Us?

If you need help with estate planning or any other legal concerns, we are here for you. Don't hesitate to contact our firm directly for assistance. Our dedicated team is ready to provide support and guidance to you and your loved ones during important life transitions.


Whether you're ready to schedule a strategy session to discuss your specific needs or if you're interested in exploring our wide range of complimentary guides and additional resources, we encourage you to get in touch with us.


With licensed attorneys and offices located in both Illinois and Missouri, we are well-equipped to serve clients in these regions. Reach out to us today and let us leverage our expertise and care to guide you through the legal process.

Helpful Guides

Begin your journey by taking advantage of our collection of complimentary guides.

View Guides

Online Documents

Simple & Convenient, Cost Effective, Attorney Reviewed Documents.

Learn More Here

Recent Posts

March 6, 2025
Whether due to a sudden illness, an unexpected hospitalization, or other urgent situations, it's important to know what essential documents should be in place and how an attorney can help ensure a smooth transition for your loved ones.
Show More
March 6, 2025
Whether due to a sudden illness, an unexpected hospitalization, or other urgent situations, it's important to know what essential documents should be in place and how an attorney can help ensure a smooth transition for your loved ones.
March 6, 2025
Click HERE To View March Newsletter
February 28, 2025
Understanding the difference between an heir and a beneficiary can help you navigate estate planning more effectively and ensure that your wishes are carried out properly.
February 21, 2025
Estate planning is about more than just dividing assets; it’s about making sure your wishes are honored when it comes to your health, finances, and legacy.
February 14, 2025
Beyond understanding the medical aspects, there are critical legal steps you should take to safeguard your rights, clarify your wishes, and prepare for any unexpected situations.
February 7, 2025
Estate planning is a sensitive and complex process that often involves difficult decisions. One of the most challenging choices parents may face is whether to leave their children unequal inheritances.
More Posts
Share by: