Do beneficiaries have to pay taxes on inherited money?
Whether a beneficiary pays taxes on money received from a trust depends on how the trust is structured. If the trust distributes its income to beneficiaries, those individuals are generally responsible for paying income tax on the amount received, and they will typically receive a K-1 tax form to report this income. If the trust retains its income and pays tax on it as its own entity, the beneficiary may not be responsible for further tax on that distribution. In some cases, such as "grantor trusts," the grantor—rather than the beneficiary—remains responsible for the tax bill. Because these rules are complex, beneficiaries should ask the trustee whether their distribution is considered income or principal and seek advice from a CPA.
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