Trust distributions are taxable when they originate from the trust’s income.
One of the key responsibilities of the successor trustee is distributing money and property held by the trust to beneficiaries. As is often the case with transfers of money and property, taxes may have to be paid. But who pays them?
Are trust distributions taxable to the recipient? Or, do trusts pay taxes? We wish we had a simple answer for you, but the subject of trust administration and taxation is a complex one. Fortunately, this article can serve as a starting point for trustees seeking to learn about the taxation of trusts.
Because of the complexities inherent in trust taxation, it is advisable for trustees — regardless of their experience level — to work alongside an experienced probate attorney or accountant, as not following taxation procedures could land them in trouble, not just with the IRS but also with beneficiaries of the trust, who could sue them for fiduciary misconduct.
Trust Tax Rates: Revocable Trust Taxes vs. Irrevocable Trust Taxes After Death of Settlor
Taxation of revocable trusts is generally simpler than taxation of irrevocable trusts. If you understand how each type of trust operates, it will be easy to see why.
A revocable trust (also called a living trust) is a trust that can be modified or revoked by the trust creator (called a settlor, grantor or trustor) during their lifetime without anyone’s consent. After the settlor dies, the trust generally will become irrevocable, meaning that its provisions must be carried out as they appear — so long as the trust is not successfully contested.
An irrevocable trust is a trust that generally cannot be modified or revoked by the settlor once it has been established. In other words, the settlor loses control of the trust and its assets once they sign the trust agreement.
Taxation of a revocable trust while the settlor is living is relatively simple. Typically, because the settlor retains full control of their trust during their lifetime, any income earned by the trust is taxable to the settlor. The tax identification number for the trust will usually be the settlor’s own social security number, and the tax rate applicable to the income will depend on the trust tax bracket the settlor falls under based on the income they earned that year.
Taxation of an irrevocable trust can be more complex, since the trust is taxed as a separate taxable entity with its own separate tax identification number. There may be no taxable income associated with the irrevocable trust as a result of its structure, or the income earned by the trust may be taxed at the highest marginal tax rates for trusts.
Because there are numerous types of trusts, each with their own set of advantages and drawbacks, it is best to discuss the tax brackets for trusts and their implications with a qualified attorney or accountant.
Taxability of Trusts: How Are Trusts Taxed?
Are trusts tax-exempt? Many people assume they are or, at the very least, that they enjoy tax benefits and protection from creditors. These assumptions, however, would be false. Trusts often are subject to the same types of taxes as individuals.
Understanding Tax Brackets for Trusts
There are several types of taxes that could apply to trusts, but how a trust is taxed will depend on factors like the type of trust it is and the way the trust is structured. If you are a successor trustee, it is a good idea to enlist the help of a probate attorney or tax professional to ensure that you not only follow the provisions of the trust, but the relevant tax rules as well.
In the following sections, we discuss the most common taxes that apply to a trust after the settlor dies — as well as list the most current trust tax rates and brackets.
Trust Income Tax Rates
If a trust earns income (as most of them do), taxes will need to be paid on that income — just as individuals and businesses generally have to pay taxes on the income they earn.
There are two types of income tax rates that could apply to trusts: ordinary income tax and capital gains tax.
Ordinary Income Tax Rates
When a settlor dies, the successor trustee’s role will begin. A responsibility they may have is generating income for the trust or managing the income it already generates. A trust can own income-producing assets, such as stocks and bonds (which may earn dividends) or real estate (which may earn rental income). In the same way individuals must pay taxes on such income, trusts must do so as well.
What is the federal income tax rates for trusts? Are trusts taxed at a higher rate? As the bulleted list below demonstrates, trust tax rates are higher than individual tax rates.
Federal trust income tax rates for 2025 are:
- For trust income between $0 to $3,150: 10% of income over $0
- For trust income between $3,150 to $11,450: 24% of income over $3,150
- For trust income between $11,450 to $15,650: 35% of income over $11,450
- For trust income above $15,650: 37% of income over $15,650
Federal trust income tax rates for 2024 were:
- For trust income between $0 to $3,100: 10% of income over $0
- For trust income between $3,100 to $11,150: 24% of income over $3,100
- For trust income between $11,150 to $15,200: 35% of income over $11,150
- For trust income above $15,200: 37% of income over $15,200
It’s important to keep in mind that your county may also charge an income tax, and that trust tax rates can vary considerably from year to year. Therefore, it is important for trustees to either keep themselves apprised of the latest tax rules or work with a professional who is well-versed in them.
Trust Capital Gains Tax Rates
Trust taxation of capital gains can be complex to navigate. Taxes are levied on trusts only when their investments, such as stocks and real estate, are sold for a higher value than their base price.
If a trust holds an investment for longer than a year before selling it, the gain will typically be subject to the lower long-term capital gains tax rate. On the other hand, if the investment is sold within a year, the trust will typically be subject to the short-term capital gains tax at the higher ordinary income rate.
The federal capital gains trust tax rates on long-term gains for 2025 are:
- Up to $3,250: 0%
- Between $3,250 to $15,900: 15%
- Over $15,900: 20%
The federal capital gains trust tax rates on long-term gains for 2024 were:
- Up to $3,150: 0%
- Between $3,150 to $15,450: 15%
- Over $15,450: 20%
If you live in California, you may be wondering what the long-term capital gains tax rates are in the state. As of 2025, California taxes long-term capital gains in the same way it taxes ordinary income, meaning capital gains are taxed between 1% and 13.3%, depending on your income level. In short, there isn’t a lower capital gains tax for long-term gains in California.
Capital gains taxes often can be offset by capital losses. For example, if a trust sells one real property for a substantial profit but sells another real property for below fair market value, the capital loss the trust suffered may nullify a portion of or all of its capital gains, placing the trust in a lower capital gains trust tax bracket, or none at all.
If you are a trustee, it’s important to have a general understanding of the difference between unrealized gains and realized gains. An unrealized gain exists in theory. For instance, a trust may own stocks that have increased significantly in value since the time of their purchase, but until those stocks are sold, they are considered unrealized gains and therefore are not subject to capital gains tax. On the other hand, if a trust owns real property that it sells for a profit, it is considered a realized gain and therefore is subject to capital gains tax.
Trust Gift Tax Rates
If someone transfers an asset during their lifetime without receiving fair market value in return, they could be subject to a gift tax — particularly if the value of the asset exceeds the gift tax exclusion amount, which is $19,000 as of 2025.
If more than $19,000 is gifted to the recipient in a year, it would count against both the lifetime gift exclusion and federal estate tax exclusion of $13.99 million.
It’s worth mentioning that some types of trusts, depending on their provisions and how they are structured, may be exempt from gift taxes. For example, irrevocable charitable trusts that are established for the benefit of a charitable foundation may be exempt. Similarly, trusts that are designed to provide the surviving spouse with income during their lifetime, such as qualified terminable interest property trusts (QTIPs) and spousal lifetime access trusts (SLATs), may also be exempt.
It’s best to consult with an attorney or tax professional before claiming exemptions to ensure the trust you oversee qualifies for them.
Trust Estate Tax Rates
Estate taxes (also referred to as “death taxes”) are levied when assets are transferred from a deceased person to beneficiaries. If a decedent’s assets are held in a probate estate, then the executor or administrator of the estate will be responsible for paying the estate tax. Conversely, if a trust has assets that are subject to the estate tax, then the trustee will be responsible for paying this tax prior to transferring the assets to beneficiaries.
That being said, most trusts will not be responsible for paying an estate tax, as estate taxes are only levied on a decedent’s assets valued at $13.99 million or higher (or double that amount for married couples) as of 2025.
Even if a decedent’s assets have a gross value that exceeds the applicable estate tax exemption amount, the estate may not be subject to estate tax if certain exceptions apply. For example, if the decedent’s will or trust provides substantial gifts to charitable entities, the gifts may qualify for a charitable deduction that reduces the taxable estate. Decedents who leave property to their surviving spouse may also benefit from a marital deduction that exempts property passing to a surviving spouse from estate taxes.
Trust Property Tax Rates
If a trust owns real estate (which many do), then it’s almost certain that the trustee will have to pay county and state property taxes on each of the properties it owns. The trustee must use trust assets to satisfy this obligation.
Once the trustee transfers a real property to beneficiaries, it will become their responsibility to pay property taxes on it annually from that point forward until they no longer own the property.
Because property taxes are generally levied on a state and local level, it’s difficult to provide specifics around rates. However, we can say that the median property tax in California is at around 0.68% of a property’s assessed value as of 2025.
Certain types of trusts — such as charitable trusts, religious trusts and educational trusts — may be exempt from property taxes. To determine if the trust you manage qualifies for a property tax exemption, speak with an experienced attorney or tax professional.
Do Beneficiaries Pay Taxes on Trust Distributions?
Whether a beneficiary needs to pay taxes on a trust distribution depends on the source of the distribution — namely whether it originated from the trust’s principal or income.
Trust Distribution Tax on Income
When a portion of a beneficiary’s distribution from a trust or the entirety of it originates from the trust’s interest income, they generally will be required to pay income taxes on it, unless the trust has already paid the income tax. However, beneficiaries will be subject to individual income tax rates as opposed to trust income tax rates, which are higher.
Any interest income the trust distributes to beneficiaries can be deducted from its taxes. On the other hand, any interest income it does not distribute before the close of the year usually will be subject to trust income tax rates.
Trust Distribution Tax on Principal
When a portion of a beneficiary’s distribution from a trust — or the entirety of it — originates from the trust’s principal, the IRS assumes that the settlor already paid taxes on it, resulting in the beneficiary not being required to pay any additional taxes.
For example, if real estate that previously had been owned by the settlor is transferred from a trust to a beneficiary, the distribution would be considered as having originated from the principal, and the beneficiary would not be responsible for paying taxes on it.
Tax Forms Required for Distributions
Trustees will need to submit a completed 1041 form (i.e., a trust income tax return) to the IRS in order to deduct from the trust’s taxable income the income it distributed to beneficiaries.
They will also need to complete a K-1 form for each beneficiary, which details how much of the beneficiary’s distribution came from income versus principal, and provide it to them so they can use it to file their personal tax return, as well as to the IRS so the agency can ensure the amount the trustee deducted on the 1041 form is accurate.
FAQs: Diving Deeper Into the Taxation of Trusts
As you can gather from reading this article, the subject of trust taxation is highly nuanced. Therefore, whether you are a trustee or beneficiary, working with a skilled probate attorney or tax professional to navigate trust taxation is crucial.
Explore the frequently asked questions below to learn more about the taxation of trusts. For personalized legal guidance, don’t hesitate to reach out to our probate firm directly. While we are not tax experts, we work closely with professionals who are and can refer you if necessary.
Are distributions from an irrevocable trust taxable to the beneficiary?
It depends. Taxes for irrevocable trusts tend to be highly complex because of the numerous variables at play. Because the settlor of an irrevocable trust has no control over the trust or its assets once the trust instrument is signed, an irrevocable trust (unlike revocable living trusts) is usually not considered a part of the settlor’s taxable estate. As a result, distributions made to beneficiaries are generally not subject to an estate tax.
In terms of whether distributions are taxable to beneficiaries, it depends on whether the trust is distributing income or principal. If the trust is distributing income, the distribution will be taxable to the beneficiary — provided income taxes hadn’t already been paid by the trust.
Can a beneficiary refuse a trust distribution?
Yes, beneficiaries are always entitled to refuse a distribution from a trust. As trustee, it’s important you ask any beneficiaries who refuse a distribution to sign a disclaimer to protect yourself against potential allegations of failing to distribute assets.
When a beneficiary refuses a distribution, they will be generally regarded as having predeceased the settlor, which would mean their inheritance will pass to the next beneficiary in line, unless the trust provides otherwise.
You’re probably wondering: Why would a beneficiary refuse a distribution? On the surface, it seems like refusing free money; however, there are some more-than-valid reasons for taking such an action. They include:
- The beneficiary is financially secure and not in need of the distribution. They may wish to preserve trust assets for the benefit of the other beneficiaries or future generations.
- The beneficiary could end up in a higher tax bracket if the distribution is made from the trust income and not the trust principal — which is something they are trying to avoid.
- The beneficiary may not agree with the terms of the trust and is refusing their distribution as a display of their dissatisfaction.
- The beneficiary receives means-based benefits (e.g., Medicaid) for which they may become ineligible once they receive a distribution.
If you are a trust beneficiary who is considering refusing their distribution, it’s recommended that you consult with an attorney first in case there may be a less drastic option available to you.
Are trust administration fees tax-deductible?
Unfortunately, there is no straightforward answer to this question. As a general rule of thumb (with some exceptions), trust administration expenses can be deducted so long as the fees incurred are related strictly to the administration of the trust and would not have been incurred had the property not been held in trust. As an example, trustee fees are 100% deductible since the only occasion in which they arise is trust administration.
Still confused about trust distribution taxes? We’re here to help.
Tax administration and taxation is not an easy area of the law to navigate, especially since tax laws tend to undergo changes every year. While you may be able to get away with mistakes elsewhere in administration, taxes are serious and should not be taken lightly. Get the help you need today by reaching out to our knowledgeable team of attorneys, some of whom are experienced in taxation.
