Part 4/6:
Tax Implications of Trusts
When income is paid out to beneficiaries, the tax treatment depends on whether the trust itself has already paid taxes on that income. If the trust did not incur taxes, the amount distributed to beneficiaries is taxable to them. Conversely, if principal assets are distributed, taxes would have been paid when these assets were first transferred into the trust, thus no taxes are typically levied at distribution.
It’s essential to understand that trusts can face high tax rates. For example, as of 2021, trusts faced a maximum income tax rate of 37% on income exceeding $13,050. Trusts also need to file IRS Form 1041ES for taxation.