Posted by Carmen Garcia

How Is Trust Fund Income Taxed?

How Is Trust Fund Income Taxed?

Taxation of trust fund income

Death and taxes are two things that you cannot avoid in life. While there are ways to minimize your tax participation, you certainly can't get rid of the tax collector. Virtually everything we earn is taxable, from our income to the proceeds from the sale of shares and property, even the assets we receive from a property. The same can be said of trust funds, which have a death and tax relationship. But how exactly are these real estate instruments taxed, and what are they? 

What is a trust fund?

Trust funds are tools used in wealth planning and are created to help build wealth for future generations. Once established, a trust becomes a legal person that owns property or other assets, such as cash, securities, personal effects, or any combination thereof, in the name of a person, city, or group. A trust is administered by a trustee, an independent third party who has no connection with the person who sets up the trust, the grantor, or the beneficiary.

Trust funds can be revocable and irrevocable, the two main types of trusts. A revocable trust, also known as a living trust, contains the grantor's assets, which can be transferred to any beneficiary designated by the grantor after their death. But any change to the trust can be made while the grantor is still alive. An irrevocable trust, on the other hand, is difficult to change but avoids any inventory problem.

Other types of trusts include, but are not limited to the following:

  • Blind trust

  • Charitable Trust

  • Marital Trust

  • Testamentary Trust

Keep in mind that a trust fund is different from a foreign trust fund, which has recently become popular as a way to avoid the US tax system. Foreign trust owners must report using Form 3520 or 3520-A.1

Taxes on trust funds

Trust funds are taxed differently, depending on what type of fund they are. A trust that distributes all of your income is considered a simple trust. Otherwise, the trust is considered complex. The tax deduction is made for income distributed to beneficiaries. In this case, the beneficiary pays income tax on a tax basis rather than on a trust.

Trust funds are taxed differently, depending on several different factors.

It is assumed that the amount allocated to the beneficiary comes first from the result of the recent year then from the accumulated principal. Usually, these are the original and subsequent contributions and income that exceed the value distributed. For both the trust and the beneficiary, capital gains of this amount may be taxed. All amounts distributed to the beneficiary and for the beneficiary benefit are taxable to the extent that the distribution of the trust is deducted.

If the income or deduction is part of a change in equity or is part of the property's distributable income, the income tax is paid by the trust and is not transferred to the beneficiary. An irrevocable trust that has the discretion to distribute assets and withhold profits pays a trust tax of $ 3,011.50 plus 37% of the excess over $ 12,500.

Income reporting

The Schedule K-1 is a versatile form. In the case of a trust, the distributed amounts generated by the trust are taxed and delivered to the IRS. In turn, the IRS issues the beneficiary's tax payment document. The trust then completes Form 1041 to determine the income distribution deduction on the amount distributed.


  • If the income or deduction is part of a change in equity or is part of the property's distributable income, the income tax is paid by the trust and is not transferred to the beneficiary.

  • The amount distributed to the beneficiary of a trust fund is deemed to come from the current year's income and, therefore, from the accumulated capital. Capital gains of this amount can be taxed for both the trust and the beneficiary.

  • The K-1 Schedule for taxing distributed amounts is generated by the trust and sent to the IRS.



Carmen Garcia
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