Do You Have to Pay Taxes on a Trust Inheritance?

Hilary Collins   Sun, Jun 16, 2024

When making an estate plan, using a trust is a way to make passing assets — including both cash and physical assets — a bit easier. In fact, when using a trust, you can often allow your family to avoid a lengthy probate process after you’ve died. Inheriting a trust comes with certain tax implications. The rules can be complex, but generally speaking, only the earnings of a trust are taxed, not the principal.

A financial advisor can help you minimize inheritance tax by creating an estate plan for you and your family. Find a financial advisor today.

Trust Basics

A trust is simply a legal vehicle which can be filled with myriad assets, including cash and physical holdings. The person who creates the trust is known as the grantor. A trust is overseen by a trustee. The trustee can be a person or a firm that manages the trust for the beneficiary. The beneficiary of the trust is the person who benefits from these assets. This beneficiary can be an individual, such as a child or other relative, or an organization like a charitable group.

Trusts are often used as a tool to minimize estate taxes. Also, while assets transferred via a will usually have to go through the probate process, trusts can usually bypass that step, speeding up the process and saving on court fees.

Types of Trusts

There are quite a few types of trusts, but one of the biggest differences between trusts is whether they’re revocable or irrevocable. A revocable trust can be modified at any point during the lifetime of the person making the trust—also known as the grantor. The grantor can add or remove beneficiaries, add or remove assets from the trust or terminate the trust completely. Once the grantor dies, the trust then becomes set in stone and can no longer be changed.

On the other hand, an irrevocable trust is set in stone as soon as it’s finalized. The grantor can’t change the beneficiaries or the terms or remove any assets from the trust once it’s established.

These are the two main categories of trusts, but there are many other types of trusts you might run into as well. These include:

Marital trusts

Bypass trusts

Charitable trusts

Generation-skipping trusts

Grantor-retained annuity trusts

Life insurance trusts

Special needs trusts

Spendthrift trusts

Testamentary trusts

Totten trusts

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How Are Trusts Taxed?

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