Taxes
Zoe Team
6 min read
Trust funds hold assets for beneficiaries, offering control and potential tax advantages.
Tax obligations depend on the type of trust and how distributions are structured.
Proper planning can help minimize inheritance taxes and ensure smooth wealth transfer.
A trust fund is a legal arrangement where a third party holds assets on behalf of a beneficiary, providing control over how and when the wealth is distributed.
Yes, tax treatment varies significantly based on the trust structure—specifically whether it is a revocable or irrevocable trust.
Inheritance taxes are determined by tax laws and the specifics of the trust, often depending on who owns the assets and the value of the estate.
What is a trust fund? What types of trust funds are there? How are taxes handled when inheriting a trust fund? What qualifies as an inheritance?
Inheriting a trust fund, property, or another type of unearned income provides ample opportunities, but also carries significant responsibilities for its beneficiaries. It can be exciting to receive these sorts of unexpected additional funds, but the rules around inherited or “unearned” income are quite confusing. Taxes, in particular, are a liability that comes with receiving a trust or other inheritance. The good news is that unlike taxes on your salary, taxes on unearned income tend to be lower. To understand inheritance trusts further, let’s explore the basics of types of taxes that apply to unearned income sources like inheriting a trust fund.
A trust or trust fund is a source of income or assets, directed and monitored by a third-party (trustee) on behalf of a grantor and/or beneficiary(ies). A trust is generally created by someone, known as the grantor, looking to protect their finances from taxes and pass possessions, such as monetary assets or property, onto loved ones.
Trust funds fall into one of two main categories:
Revocable (living) trusts can be assigned to any beneficiary following the grantor’s death. Changes can be made to the trust while the grantor is still alive. The ability to modify the trust, while handy, means it also loses certain benefits (ie. creditor protection.)
Irrevocable trusts have terms that can’t be changed or terminated without the permission of the person who’ll be receiving the trust. The grantor legally loses the rights of ownership over the assets and transfers ownership over completely to the trust’s beneficiary.
If you become heir to a trust fund, you become responsible for any associated taxes. That said, taxes on those funds are only applicable to any income that the fund has received following the trust’s inception, otherwise known as the principal. This also applies to income that is distributed to beneficiaries. If capital gains apply, these are taxed to the beneficiary of the trust. Once the fund has been received by the trustee, they are required to report fund distributions. If changes are made to the grantor’s distributable income, the tax payment is carried by the trust, rather than the beneficiary(ies). A financial advisor can help navigate the complexities of capital gains associated with receiving a trust, as well as the various tax forms that come with receiving a trust.
When the trust is granted to the beneficiary(ies), the trustee is responsible for reporting on Form K-1. Form K-1 details the principal and the interest amounts within the fund. Often, a trust fund is accredited by an employer identification number which is recorded on Form 1040 or Form 1041, and used to report any gains or losses on the initial endowment. Form 1040 is used if the money is paid out to the beneficiary(ies). Form 1041 is completed when the revenues are preserved by the trust.
Keep in mind that the trustee will not have to pay taxes if the fund’s assets are distributed to the beneficiary(ies), prior to any income being earned. Simply put, if the trust has not earned any income, then the trustee will not have to report Form 1041. In the case of an irrevocable trust, if the account retains grosses and has the freedom to distribute amounts, tax payment of $3,011.50 is required, additional to 37% of the excess over $12,500.
“Inheritance” refers to an asset (or assets) that are left to a loved one following the death of the proprietor; as per their last will or testament. Inheritance may be in the form of jewelry, a property, a set amount of money in cash or investments, or other types of an estate. These are all subject to inheritance tax.
Inheritance tax is the amount payable by the heir, on what has been received. Inheritance tax is often interchanged with the term estate tax. However, the two are very different. Where estate tax focuses on the transfer of entire estate ownership and the importance of property value, inheritance tax centers on the heir. In many cases, estates are often taxed twice: first at the state level and then at the federal level. Inheritance taxes, in particular, are only accumulated by states.
Only 6 states require an inheritance tax: Maryland, Nebraska, Kentucky, New Jersey, Pennsylvania, and Iowa. Tax percentages differ for each state and are subject to change (they currently sit between 1% to 20%). Despite such states imposing inheritance taxes, there are many circumstances where individuals are exempt. For example, if a person’s wife or husband passed away, the spouse is automatically exempt from inheritance tax, no matter the property’s location. In some states, children and grandchildren who inherit property may also avoid the inheritance tax.
The estate’s value will determine how an individual might approach the associated tax. If the estate has a hefty sum, then an estate planner will best guide an individual on how to minimize the tax burden. Where the estate is smaller, then exemptions to inheritance taxes differ for each heir. As mentioned, inheritance tax rates vary according to each state, and an heir’s relationship to the deceased determines an individual’s tax bracket for any involved assets.
For example, an heir with no familial relationship with the deceased is more likely to pay a higher tax rate. Inheritance tax can be avoided if the heir asks the proprietor to provide them with an allotment of the inheritance on a yearly basis. As of 2020, $15,000 can be freely gifted to a person without any tax sanctions. Those who are married with property can give away up to $30,000. As with a trust fund, another alternative is that the heir asks the proprietor to set up a revocable trust fund.
Inheriting a trust fund can make a big difference for your financial situation! While exciting, it’s important to consult an advisor who can guide you through the process of being a beneficiary and the taxes associated with your new unearned income. Given that tax rates tend to vary for each unearned income type, it is important that you understand income origin and are aware of tax liabilities.
Although there are numerous exceptions, unearned income such as a trust or an inheritance is nearly always liable to taxation. While unearned income is usually classified as a non-professional money-making compensation unaffected by payroll taxes, as a beneficiary, you will be taxed on it as part of your adjusted gross income. Additionally, there are many circumstances where assets may be taxed at a lower rate. Consider your trust or inheritance an opportunity to further empower your financial future. A fiduciary financial advisor with experience in managing these funds can make the difference in optimizing your funds and the taxes associated.
What is a trust fund? What types of trust funds are there? How are taxes handled when inheriting a trust fund? What qualifies as an inheritance?
Inheriting a trust fund, property, or another type of unearned income provides ample opportunities, but also carries significant responsibilities for its beneficiaries. It can be exciting to receive these sorts of unexpected additional funds, but the rules around inherited or “unearned” income are quite confusing. Taxes, in particular, are a liability that comes with receiving a trust or other inheritance. The good news is that unlike taxes on your salary, taxes on unearned income tend to be lower. To understand inheritance trusts further, let’s explore the basics of types of taxes that apply to unearned income sources like inheriting a trust fund.
A trust or trust fund is a source of income or assets, directed and monitored by a third-party (trustee) on behalf of a grantor and/or beneficiary(ies). A trust is generally created by someone, known as the grantor, looking to protect their finances from taxes and pass possessions, such as monetary assets or property, onto loved ones.
Trust funds fall into one of two main categories:
Revocable (living) trusts can be assigned to any beneficiary following the grantor’s death. Changes can be made to the trust while the grantor is still alive. The ability to modify the trust, while handy, means it also loses certain benefits (ie. creditor protection.)
Irrevocable trusts have terms that can’t be changed or terminated without the permission of the person who’ll be receiving the trust. The grantor legally loses the rights of ownership over the assets and transfers ownership over completely to the trust’s beneficiary.
If you become heir to a trust fund, you become responsible for any associated taxes. That said, taxes on those funds are only applicable to any income that the fund has received following the trust’s inception, otherwise known as the principal. This also applies to income that is distributed to beneficiaries. If capital gains apply, these are taxed to the beneficiary of the trust. Once the fund has been received by the trustee, they are required to report fund distributions. If changes are made to the grantor’s distributable income, the tax payment is carried by the trust, rather than the beneficiary(ies). A financial advisor can help navigate the complexities of capital gains associated with receiving a trust, as well as the various tax forms that come with receiving a trust.
When the trust is granted to the beneficiary(ies), the trustee is responsible for reporting on Form K-1. Form K-1 details the principal and the interest amounts within the fund. Often, a trust fund is accredited by an employer identification number which is recorded on Form 1040 or Form 1041, and used to report any gains or losses on the initial endowment. Form 1040 is used if the money is paid out to the beneficiary(ies). Form 1041 is completed when the revenues are preserved by the trust.
Keep in mind that the trustee will not have to pay taxes if the fund’s assets are distributed to the beneficiary(ies), prior to any income being earned. Simply put, if the trust has not earned any income, then the trustee will not have to report Form 1041. In the case of an irrevocable trust, if the account retains grosses and has the freedom to distribute amounts, tax payment of $3,011.50 is required, additional to 37% of the excess over $12,500.
“Inheritance” refers to an asset (or assets) that are left to a loved one following the death of the proprietor; as per their last will or testament. Inheritance may be in the form of jewelry, a property, a set amount of money in cash or investments, or other types of an estate. These are all subject to inheritance tax.
Inheritance tax is the amount payable by the heir, on what has been received. Inheritance tax is often interchanged with the term estate tax. However, the two are very different. Where estate tax focuses on the transfer of entire estate ownership and the importance of property value, inheritance tax centers on the heir. In many cases, estates are often taxed twice: first at the state level and then at the federal level. Inheritance taxes, in particular, are only accumulated by states.
Only 6 states require an inheritance tax: Maryland, Nebraska, Kentucky, New Jersey, Pennsylvania, and Iowa. Tax percentages differ for each state and are subject to change (they currently sit between 1% to 20%). Despite such states imposing inheritance taxes, there are many circumstances where individuals are exempt. For example, if a person’s wife or husband passed away, the spouse is automatically exempt from inheritance tax, no matter the property’s location. In some states, children and grandchildren who inherit property may also avoid the inheritance tax.
The estate’s value will determine how an individual might approach the associated tax. If the estate has a hefty sum, then an estate planner will best guide an individual on how to minimize the tax burden. Where the estate is smaller, then exemptions to inheritance taxes differ for each heir. As mentioned, inheritance tax rates vary according to each state, and an heir’s relationship to the deceased determines an individual’s tax bracket for any involved assets.
For example, an heir with no familial relationship with the deceased is more likely to pay a higher tax rate. Inheritance tax can be avoided if the heir asks the proprietor to provide them with an allotment of the inheritance on a yearly basis. As of 2020, $15,000 can be freely gifted to a person without any tax sanctions. Those who are married with property can give away up to $30,000. As with a trust fund, another alternative is that the heir asks the proprietor to set up a revocable trust fund.
Inheriting a trust fund can make a big difference for your financial situation! While exciting, it’s important to consult an advisor who can guide you through the process of being a beneficiary and the taxes associated with your new unearned income. Given that tax rates tend to vary for each unearned income type, it is important that you understand income origin and are aware of tax liabilities.
Although there are numerous exceptions, unearned income such as a trust or an inheritance is nearly always liable to taxation. While unearned income is usually classified as a non-professional money-making compensation unaffected by payroll taxes, as a beneficiary, you will be taxed on it as part of your adjusted gross income. Additionally, there are many circumstances where assets may be taxed at a lower rate. Consider your trust or inheritance an opportunity to further empower your financial future. A fiduciary financial advisor with experience in managing these funds can make the difference in optimizing your funds and the taxes associated.
Disclosures: Zoe Financial, Inc. ("Zoe Financial") is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Zoe Financial provides investment advisory services and access to independent registered investment advisers through its platform. The information provided by Zoe Financial is for educational and informational purposes only and should not be construed as personalized investment advice or as an offer to buy or sell any security. All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. Clients should consult with their own financial, tax, or legal professionals before making any investment decisions. The material presented by Zoe Financial is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Material presented has been gathered from sources believed to be reliable, however Adviser cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Past performance is no guarantee of future results. Zoe Financial does not provide legal or tax advice, and nothing contained in these materials should be taken as legal or tax advice. SEC Registration does not constitute an endorsement of Zoe Financial by the SEC nor does it indicate that Zoe Financial has attained a particular level of skill or ability. The sole purpose of this material is to inform, and it in no way is intended to be an offer or solicitation to purchase or sell any security, other investment or service, or to attract any funds or deposits. Investments mentioned may not be appropriate for all clients. Before making any investment, each investor should carefully consider the risks associated with the investment, as discussed in the applicable offering memorandum, and make a determination based upon their own particular circumstances, that the investment is consistent with their investment objectives and risk tolerance. Lower expenses do not guarantee better investment performance. Certain information contained herein may constitute forward-looking statements. Due to various risks and uncertainties, actual events, results or the performance of a fund may differ materially from those reflected or contemplated in such forward-looking statements.
Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.
Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.
The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.
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Copyright © 2026 Zoe Financial, Inc. | All rights reserved
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Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.
Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.
The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.
Explore the Zoe Wealth Platform with AI
Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.
(646) 680-9244
support@zoefin.com
666 Third Ave, 6th Floor
New York, NY, 10017
Copyright © 2026 Zoe Financial, Inc. | All rights reserved
Find an Advisor
Retirement Planning
Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.
Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.
The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.
Explore the Zoe Wealth Platform with AI
Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.
(646) 680-9244
support@zoefin.com
666 Third Ave, 6th Floor
New York, NY, 10017
Copyright © 2025 Zoe Financial, Inc. | All rights reserved
