Do You Really Get a K-1 From a Trust? – Avoid this Mistake + FAQs
- March 30, 2025
- 7 min read
Yes, you can receive a Schedule K-1 (Form 1041) from a trust.
Over 3 million trust and estate tax returns are filed each year in the U.S., issuing millions of K-1 forms to beneficiaries.
In this comprehensive guide, you’ll learn:
All types of trusts and K-1s: How revocable, irrevocable, grantor, simple, and complex trusts handle K-1 tax forms for their beneficiaries.
Key players & roles: The responsibilities of the trustee, grantor, beneficiary, IRS and state tax agencies in trust taxation.
Federal vs. state rules: Why federal law requires trusts to issue K-1s, plus a 50-state breakdown of how local state laws treat trust income (don’t get caught by a state tax surprise!).
K-1 vs. other tax forms: How a trust’s K-1 compares to a 1099 or W-2, and why missing a K-1 could lead to big mistakes (and how to avoid them).
Real examples & tips: Illustrated scenarios of trust distributions, pros and cons of getting a K-1, common pitfalls to dodge, and recent court rulings every beneficiary should know.
Schedule K-1 from a Trust: What It Is and How It Works
A Schedule K-1 (Form 1041) is a tax form that trusts and estates issue to their beneficiaries each year. It reports the beneficiary’s share of the trust’s income, deductions, and credits. In other words, if a trust earned money and passed it to you, the K-1 is the official report of what you got and what kind of income it was.
Unlike a typical W-2 or 1099 (which shows income you earned directly), a K-1 shows income that the trust earned on its investments (like interest, dividends, rent, or capital gains) but paid out to you. The IRS treats the beneficiary as the taxpayer on that distributed income.
The K-1 breaks down various categories – interest, ordinary dividends, long-term capital gains, etc. – so you know exactly where to report each item on your personal tax return.
The trustee (the person or institution managing the trust) prepares Form 1041, the trust’s income tax return, and attaches a Schedule K-1 for each beneficiary who received a distribution of income. Each beneficiary receives their own copy of the K-1. You’ll use this K-1 to fill out your Form 1040 (or your business tax return if the beneficiary is an entity).
The IRS also gets a copy of the K-1, so they know how much income was allocated to you. The K-1 itself doesn’t usually have taxes withheld – most trusts do not withhold income taxes for beneficiaries the way employers do for wages. That means it’s up to you to pay any tax due on the income it reports (often through estimated taxes or at tax filing time).
Why Trusts Issue K-1s: Pass-Through Taxation 101
Trusts (and estates) are a unique type of taxpayer – they can pay their own income taxes or pass that tax obligation to someone else (the beneficiaries). This is known as pass-through taxation. The idea is that trust income is generally taxed only once: either the trust pays it (if income stays in the trust) or the beneficiary pays it (if income is paid out).
To make sure it’s only taxed once, the IRS lets the trust take a deduction for any income it distributes to beneficiaries. The beneficiaries then report that income via the K-1 on their own returns. This way, the same income isn’t taxed to both the trust and the person who receives it – it “passes through” to the recipient.
There’s an important concept in trust taxation called Distributable Net Income (DNI). DNI is basically the trust’s taxable income for the year, with some technical adjustments (for example, excluding capital gains if those are allocated to principal). It serves as a ceiling on how much income the trust can pass through to beneficiaries for tax purposes.
The K-1 will only report income up to the DNI amount (divided among the beneficiaries according to what they actually received or are entitled to). If a trust distributes more cash than its income (for example, paying out some of the trust’s principal), that extra amount is not taxable income to the beneficiary – it’s treated as a non-taxable distribution of trust principal or previously taxed income. In short, the K-1 won’t include non-taxable principal distributions.
Because trusts reach the top tax bracket very quickly (earning over roughly $14,000 of income can hit the 37% rate!), many trustees prefer to distribute income to beneficiaries. Beneficiaries often have a lower tax bracket or at least get to use their own tax rates on that income.
This can save the family money overall. However, some trusts need to retain income (for example, to grow the principal, or because the beneficiary isn’t ready to receive it). In those cases, the trust will pay the tax itself at the trust’s high rates, and the beneficiary won’t get a K-1 for that retained income.
Trust Income vs. Principal – Fiduciary Accounting: It’s worth noting that what counts as “income” versus “principal” is determined by fiduciary accounting (state trust law and the trust document).
For instance, interest and dividends are usually considered income, while capital gains are often considered part of the trust principal (unless the trustee or the trust terms direct otherwise).
A simple trust typically must distribute all of its fiduciary accounting income each year to the income beneficiaries – which means all the interest and dividend income goes out via K-1.
A complex trust can accumulate income if the trustee so decides. Even a complex trust might be required to distribute a certain amount or certain types of income under the trust’s terms, but it has more flexibility.
The key point: when the trustee tallies up the trust’s income for the year, they look at both the tax rules (to calculate DNI) and the trust law (to see what must be paid out to beneficiaries).
The Schedule K-1 reflects the outcome: it shows the portion of trust income that actually went to the beneficiary and is taxable to them. Meanwhile, any income that stayed in the trust gets taxed on the Form 1041 (and no K-1 is issued for that portion).
Trustee, Grantor, Beneficiary: Who Does What in Trust Taxes?
Trustee: The trustee is the person (or institution) in charge of the trust assets. They have a fiduciary duty to manage the trust in the beneficiaries’ best interest. When it comes to taxes, the trustee is responsible for filing the trust’s income tax return (Form 1041) each year and paying any tax due from the trust.
The trustee (often with the help of an accountant) also prepares the Schedule K-1s for each beneficiary and must send these K-1s to the beneficiaries (and file them with the IRS) on time. Essentially, the trustee is the one who makes sure the IRS gets its information and any taxes due from the trust. If the trustee messes up (for example, doesn’t file or sends K-1s late), the IRS can assess penalties on the trust (or trustee) – not on the beneficiaries.
Grantor (Settlor): The grantor (also called the settlor or trustor) is the person who created and funded the trust. For a revocable trust (grantor trust), the grantor still owns the trust assets for tax purposes – meaning all the trust’s income gets reported on the grantor’s own tax return (no K-1s to beneficiaries while the grantor is alive). If the trust is irrevocable and not a grantor trust, then the grantor is no longer taxed on it – the trust and/or beneficiaries are.
The grantor’s role is mostly in setting up the rules of the trust; after that, the grantor may not have any ongoing duties (especially if they can’t revoke the trust). However, if the trust is a grantor trust for tax purposes (which can even be the case with some irrevocable trusts, if the terms trigger certain IRS rules), the grantor is essentially treated as the taxpayer for the trust’s income.
In those cases, the trust might not issue K-1s to the beneficiaries because the grantor is paying all the tax. Instead, the trust either doesn’t file at all or files a Form 1041 that basically says “all income taxable to the grantor” (and provides an information statement to the grantor).
Beneficiary: The beneficiary is the person (or people, or even organization) who benefits from the trust. If you are a trust beneficiary and the trust distributes income to you, you will receive a K-1 showing that income.
As a beneficiary, your main job at tax time is to report the K-1 income on your tax return accurately and pay any necessary tax on it. Beneficiaries should keep in touch with the trustee to know if a K-1 is coming, especially if the trust is complex or often files extensions (which can delay the K-1).
A beneficiary generally doesn’t file any separate form to send the K-1 to the IRS – the trustee does that as part of the trust’s return. The beneficiary just uses the K-1 data on their own 1040 (for example, reporting interest and dividends on Schedule B, capital gains on Schedule D, etc., as detailed by the K-1).
Internal Revenue Service (IRS): The IRS sets the rules for how trust income is taxed and what forms are used. The IRS requires trusts to file Form 1041 and issue Schedule K-1s to beneficiaries so that it can cross-check that income gets reported by someone. The IRS can audit a trust or a beneficiary if there are discrepancies – for example, if the trust deducted a $50,000 distribution but the beneficiary “forgot” to report the $50,000 K-1 income, that will raise a red flag.
The IRS also imposes penalties if a trustee fails to file required returns or provide K-1s on time. (Yes, trustees can be fined per beneficiary for late or incorrect K-1s – so they have a strong incentive to get it right!)
State Tax Agencies: Each state has its own rules about taxing trust income (more on that in the state section below). Generally, states want their share of tax if the trust or the beneficiaries have a connection to the state. For example, if a trust is administered in California or has California resident beneficiaries, the California Franchise Tax Board will expect a state fiduciary income tax return and state K-1s to those beneficiaries.
State tax agencies may require the beneficiary to file a state tax return reporting the K-1 income in that state (even if the beneficiary lives elsewhere). This means a beneficiary might have to file multiple state returns for one trust distribution, depending on where the trust’s income was earned. We’ll compare all 50 states in a moment – the key is, don’t ignore state taxes on trust income.
Probate Courts: Typically, a living trust avoids probate court supervision, but probate (or surrogate’s court) can become involved with trusts in some circumstances. If the trust was created by a will (a testamentary trust), the probate court might oversee aspects of it as part of the estate administration, and the court may require periodic accountings (which include reporting how income was distributed and taxes paid).
Probate courts also get involved if there’s a dispute between a trustee and beneficiaries – for instance, if beneficiaries think the trustee isn’t distributing income properly or isn’t following the trust terms (which can affect who gets a K-1 and how much). Additionally, when an estate is being administered (under court supervision), the estate’s executor often functions similarly to a trustee, issuing K-1s to the heirs for estate income. In short, courts ensure that trustees and executors follow the law and the trust or will instructions, especially if conflicts arise.
Types of Trusts (and How They Handle K-1s)
Not all trusts are taxed the same way. The way a trust is structured – and the wording in the trust document – determines whether it issues a K-1 or not. Here are the main categories:
Revocable Living Trust (Grantor Trust): A revocable trust (often used in estate planning) is considered a grantor trust for income tax purposes. That means the grantor (the person who set it up) can revoke or change it at any time, and they are treated as the owner of the trust’s assets for tax. Tax outcome: All the trust’s income is taxed to the grantor personally. The trustee may not even need to file a Form 1041 for the trust, or if they do, it’s an “information only” return that basically says “all income is reported on the grantor’s Form 1040.” No Schedule K-1s are issued to anyone else because the grantor is the one paying the tax.
Example: You set up a revocable living trust for yourself, and it earns $1,000 of interest this year. That $1,000 will be reported on your personal tax return (your Form 1040) – usually you’ll just get a 1099-INT from the bank in your own name or the trust’s name (with your Social Security Number). Bottom line: While the grantor is alive and the trust is revocable, beneficiaries (like your kids who will inherit later) do not get K-1s, because they aren’t receiving any of the income yet – you are.
Irrevocable Trust (Non-Grantor Trust): Once a trust is irrevocable (for example, after the grantor dies, or if it was set up from the start to be irrevocable), the trust becomes its own tax entity – unless certain grantor trust rules still treat it as owned by someone else. Many irrevocable trusts are non-grantor trusts, meaning the trust itself or its beneficiaries pay the tax, not the original grantor. An irrevocable trust will file Form 1041 each year if it has at least $600 of income (or any taxable income, or a nonresident alien beneficiary), and it will issue K-1 forms to any beneficiaries who receive distributions of the trust’s taxable income.
For tax purposes, irrevocable trusts are classified each year as either a simple trust or a complex trust:
Simple Trust: A simple trust is required to distribute all of its income to beneficiaries annually and cannot distribute principal (or make charitable donations from income). Because it must pay out all income, a simple trust typically ends up with no taxable income at the trust level – it passes everything through. The beneficiaries will each get a K-1 for their share of the trust’s income each year. For example, if a simple trust earns $5,000 of interest and dividends in a year, it must distribute that $5,000 (perhaps split among the beneficiaries per the trust terms). Each beneficiary then reports their portion as shown on the K-1, and the trust itself usually owes no tax on that income (it gets a deduction for distributing it). Capital gains in a simple trust usually stay in the trust (since gains are principal), so the trust might pay tax on gains while passing the regular income to the beneficiaries.
Complex Trust: A complex trust is any trust that isn’t required to distribute all income. Complex trusts can accumulate income, distribute it at the trustee’s discretion, distribute principal, and/or make charitable contributions. Because of this flexibility, a complex trust might distribute only part of its income in a given year (or none at all). The trust will issue K-1s only for the income that is actually distributed (or required to be distributed) to beneficiaries. Any income not distributed remains taxable to the trust. Example: A complex trust earns $10,000 of income ($6k interest/dividends and $4k capital gains). The trustee decides to distribute $6,000 to the beneficiary and retain $4,000 in the trust. The beneficiary’s K-1 will show $6,000 of taxable income (her share of the trust’s income), and the trust will pay tax on the $4,000 it kept. If the trust also gave the beneficiary an extra $5,000 out of the trust’s principal (beyond current income), that $5,000 is a tax-free principal distribution – it’s not part of the trust’s current taxable income, and won’t appear on the K-1 at all.
Grantor Trusts (Special Cases): Not all grantor trusts are revocable living trusts. Sometimes, an irrevocable trust can be structured so that it’s treated as a grantor trust for income tax purposes, meaning the grantor (or another person) is still on the hook for the taxes. This is often done intentionally in estate planning (for example, an intentionally defective grantor trust, where the trust is irrevocable but the grantor retains certain powers that make it “grantor” for income tax). In those cases, even though the trust is irrevocable and beneficiaries might be receiving distributions, the trust’s income is being taxed to the grantor (or other owner) under the IRS grantor trust rules. The trust might still distribute cash to beneficiaries, but for tax reporting, it will either not file a full 1041 or it will file a return that states all income is taxable to the grantor. No K-1s are issued to the beneficiaries for that income, because the beneficiaries aren’t the ones paying the tax. (Often the trustee will send the grantor a letter or statement each year listing the trust’s income, so the grantor can report it on their 1040 – but that’s outside the K-1 system.)
Note: Estates of deceased individuals operate similarly to non-grantor trusts. An estate will file Form 1041 and issue K-1s to the heirs (beneficiaries of the estate) for any income it distributes to them. So if you inherit from an estate that earned income during administration, you might receive a “Schedule K-1 (Form 1041)” from the estate. The rules for estate K-1s are almost identical to those for trust K-1s.
Who Can Be a Beneficiary (and Receive a K-1)?
A trust can name almost anyone or anything as a beneficiary – and whoever (or whatever) receives the trust’s income will get a K-1 if that income is taxable. The most common recipients are individual people, but beneficiaries can also be organizations or other legal entities. Here are some examples:
Individuals: Most trust beneficiaries are people – children, grandchildren, other relatives, etc. If you’re an individual beneficiary, you’ll include the K-1 income on your personal Form 1040. (If a trust has multiple individual beneficiaries, each one gets their own K-1 for their share of the income.)
Married Couples: Sometimes a trust might list a married couple together as beneficiaries. In practice, distributions might be made separately or jointly. Typically, if both spouses are beneficiaries, the trustee will allocate income between them (according to the trust terms or evenly) and issue separate K-1s to each spouse for their portion. (Each spouse would then report their K-1 income on their own return, just like any other income.)
Businesses and Entities: A beneficiary could be a company, another trust, or even an estate. For example, a trust might be set up to pay income to a family LLC or to a deceased person’s estate (perhaps if a beneficiary died, their share goes to their estate). In these cases, the Schedule K-1 is made out to that entity’s tax ID rather than an individual’s SSN. The entity would then handle the income on its own tax return. For instance, if a corporation is a trust beneficiary, it would include the K-1 income on its corporate return. If a partnership or LLC is a beneficiary, that income might flow through to its partners or members via that entity’s own K-1. (Layers of K-1s can happen in complex ownership structures!)
Charities: Trusts often include charities as beneficiaries (especially in charitable trusts or as remainder beneficiaries). A charity can receive a trust distribution and will get a Schedule K-1 as well. However, qualified charities are tax-exempt, so they won’t pay income tax on the K-1 amount. The trust typically gets a charitable deduction for that distribution. Essentially, distributing income to a charity lets the trust avoid tax on that portion and the charity doesn’t owe tax either – a win-win scenario. (Example: A trust earns $10,000 and pays $10,000 to a charity beneficiary. The trust’s 1041 deducts that $10k distribution, so the trust owes no tax, and the charity, being tax-exempt, doesn’t owe tax on the $10k either. The K-1 in that case is more of an informational form.)
Estates: It sounds odd, but an estate (the legal entity for a deceased person’s assets) can be a beneficiary of a trust. This might happen if the trust says that upon a beneficiary’s death, their share goes to their estate (to then be distributed under their will). In this scenario, the trust would issue the K-1 to the beneficiary’s estate. The executor of that estate would then include the K-1 income on the estate’s own Form 1041. This is a relatively uncommon situation and usually temporary (until the estate distributes assets to its own heirs), but it does occur.
Key takeaway: Whoever is legally entitled to the trust’s income in a given year is the one who must report that income – and thus gets a K-1. If you’re a beneficiary, whether you are an individual or an entity, make sure the trustee has your correct tax ID info so they can issue the K-1 properly. And if you receive a K-1 that doesn’t belong to you (say, it should have gone to a deceased relative’s estate), alert the trustee or executor to correct it. You should only report K-1 income that is actually allocated to you.
K-1 vs 1099 vs W-2: How Trust Income Reporting Differs
It’s easy to get confused about different tax forms. A Schedule K-1 from a trust is very different from the forms you might be more familiar with (like a W-2 or a 1099). Here’s a quick comparison:
W-2 (Wage Income): A W-2 is what you receive from an employer if you have a job. It reports your salary or wages and how much tax was withheld. Trust distributions are not wages – they’re not earned income for working. So you will never get a W-2 for trust distributions. Also, no Social Security or Medicare taxes apply to trust income that comes via a K-1 (since it’s investment or passive income, not a paycheck). In short, K-1 income is not wage income, and it won’t be reported on a W-2.
1099 Forms (Interest, Dividends, etc.): Forms 1099 (such as 1099-INT for interest, 1099-DIV for dividends, 1099-B for brokerage sales) are issued by banks, companies, or brokers to the person who owned the account or investment. If you own stocks in your own name, you get the 1099-DIV for dividends. But if those stocks are held by a trust, the trust receives the 1099-DIV instead. The trust then may pass that income to you and issue you a K-1 for your share. In essence, the K-1 picks up where the 1099 left off – the bank gave the trust a 1099 for, say, $1,000 of dividends, and the trust gives you a K-1 showing, say, $1,000 of dividends (assuming it distributed that income to you). The K-1 categories mirror the 1099 categories so that you get the correct tax treatment (for example, qualified dividends from the trust are still treated as qualified dividends on your return, capital gains retain their character, tax-exempt interest remains tax-exempt to you, etc.). Also note: 1099s are typically sent by January 31, but a trust K-1 often comes later – sometimes much later if the trust is on extension. Beneficiaries often have to wait longer for K-1s than for regular 1099 forms.
Schedule K-1 (Pass-Through Income): A K-1 is a pass-through information form. It’s not about income you earned directly; it’s about income someone else (a trust, estate, partnership, or S-corp) earned and is assigning to you for tax purposes. Unlike a single 1099, a K-1 can include many types of income and deductions all on one form. One part of a K-1 might show interest income, another part dividends, another part capital gains, etc., plus maybe your share of any deductible expenses or credits from the entity. It’s a composite snapshot of your share of the entity’s tax items. Also, K-1 forms generally do not have federal or state taxes withheld. (The exception might be if the beneficiary is a foreign person – then the trust might have to withhold U.S. tax on their distribution – but for U.S. beneficiaries, withholding usually doesn’t apply.) This means if you’re receiving significant income via a K-1, you may need to pay estimated taxes or adjust your wage withholding elsewhere to cover the tax, since no taxes are taken out of the K-1 distribution itself. In summary, a trust K-1 is similar to a 1099 in that it reports investment income to you, but it comes through a trust as an intermediary. Don’t mistake a trust distribution for a bank payment – the forms and tax treatment differ. Practical tip: If you’re expecting a trust K-1 and it’s not in hand by tax time, consider filing an extension for your return. It’s better to wait for the correct K-1 than to guess at the numbers, because the IRS will be matching what you report with what the trustee reported on that K-1.
State Taxation of Trust K-1s: 50-State Comparison
Federal law is just part of the story – U.S. states have their own income tax rules for trusts and beneficiaries. In general, if a state has an income tax, it will tax trust income that has a connection to that state. But the “connection” can be defined differently by each state:
Some states tax a trust if the trustee is a resident of that state.
Some tax it if the grantor was a state resident when the trust became irrevocable (for example, at the grantor’s death).
Some tax based on a beneficiary’s residency (if a beneficiary lives in that state) or if the trust’s assets are located in that state.
And states will always tax income that is sourced from that state (for example, rental income from property located in-state).
If a trust is considered a resident of a state or earns income in that state, it typically must file a state fiduciary income tax return and provide state-level K-1s to the beneficiaries. Meanwhile, the beneficiary’s home state might also tax them on the same income. To avoid double taxation, most states offer tax credits if you pay tax to another state on the same income. (For instance, if you pay tax on a trust K-1 to State A as a nonresident, your home State B will often give you a credit for that, so you’re not paying twice on the same dollars.)
The table below summarizes whether each state taxes trust income and any notable differences in how they handle K-1s or trust residency:
| State | Trust Income Tax? | Notable K-1 Treatment / Rules |
|---|---|---|
| Alabama | Yes | Requires state fiduciary return (Form 41) and AL K-1 to beneficiaries. |
| Alaska | No | No state income tax (no state K-1 filing required). |
| Arizona | Yes | Requires AZ Form 141 (fiduciary return) with an AZ K-1 for beneficiaries. |
| Arkansas | Yes | State fiduciary return (Form AR1002F) and AR K-1 issued to beneficiaries. |
| California | Yes | Uses Form 541 and CA Schedule K-1. California taxes trust income if the trustee or a beneficiary is a CA resident, or if income is from CA sources (one of the most expansive state tax regimes). |
| Colorado | Yes | State Form 105 filed for trusts; CO K-1 provided to beneficiaries. |
| Connecticut | Yes | Requires CT-1041 return and CT K-1 for beneficiaries. (Connecticut also imposes its own gift tax on certain large trust distributions, separate from income tax.) |
| Delaware | Yes | Fiduciary return (Form 400) required. Delaware, a popular trust situs, generally does not tax trust income if no beneficiaries are Delaware residents. (In other words, a trust with no DE resident beneficiaries can accumulate income tax-free in Delaware.) |
| Florida | No | No state income tax (no trust tax return or K-1 needed for FL). |
| Georgia | Yes | State Form 501 filed for trust; GA Schedule K-1 issued to beneficiaries. |
| Hawaii | Yes | State return (Form N-40) and HI K-1 for beneficiaries. (Hawaii generally follows federal trust taxation rules closely.) |
| Idaho | Yes | Trusts file Idaho Form 66; beneficiaries receive ID K-1s for any distributed income. |
| Illinois | Yes | IL-1041 return and Schedule K-1-T for beneficiaries. Illinois taxes trust income at a flat rate (currently 4.95%) and treats a trust as a resident if the decedent (for a testamentary trust) or the grantor (for a living trust) was an IL resident. |
| Indiana | Yes | Trust files IN Form IT-41; IN K-1s go to beneficiaries. (Indiana has a flat state tax ~3.15% plus county taxes.) |
| Iowa | Yes | Trusts file IA 1041 and issue Iowa K-1s to beneficiaries. (Iowa allows beneficiaries a credit for any tax the trust paid to another state to avoid double taxation.) |
| Kansas | Yes | State fiduciary return (Form K-41) and Kansas K-1 to beneficiaries. |
| Kentucky | Yes | Trust files KY Form 741; KY K-1 provided to each beneficiary. |
| Louisiana | Yes | Trusts file LA IT-541; LA K-1 forms go to beneficiaries. (Louisiana taxes resident trusts on all income and nonresident trusts on LA-source income.) |
| Maine | Yes | Requires Form 1041ME and Schedule 1041B for beneficiaries. (Maine generally conforms to federal definitions of taxable trust income.) |
| Maryland | Yes | Trust files MD Form 504; MD Schedule K-1 issued to beneficiaries. |
| Massachusetts | Yes | State Form 2 for trust income; MA Schedule 2K-1 to beneficiaries. (Massachusetts may treat a trust as a resident if the grantor was a MA resident, but it provides certain exceptions if all trustees and beneficiaries are out of state.) |
| Michigan | Yes | Trusts file MI-1041; MI K-1 forms to beneficiaries. (Michigan has a flat 4.25% income tax for trusts and individuals.) |
| Minnesota | Yes | Trust files MN Form M2; beneficiaries get MN K-1s. Minnesota’s Supreme Court (Fielding case, 2018) struck down taxing a trust solely because the grantor was a MN resident if the trust had no other Minnesota contacts. |
| Mississippi | Yes | State Form 81-110 for trusts; MS K-1 provided to beneficiaries. |
| Missouri | Yes | Trusts file MO-1041; MO K-1 issued to beneficiaries. |
| Montana | Yes | Trust files MT FID-3; MT Schedule K-1 to beneficiaries. (Montana taxes resident trusts on all income, similar to federal rules.) |
| Nebraska | Yes | State Form 1041N filed; NE Schedule K-1N provided to beneficiaries. |
| Nevada | No | No state income tax (no NV fiduciary return or K-1). |
| New Hampshire | No | No broad income tax. (NH historically taxed interest/dividend income at 5%, but trusts have been exempt and the tax is being phased out entirely by 2025.) |
| New Jersey | Yes | Trust files NJ-1041; NJ K-1 to beneficiaries. (New Jersey taxes “resident trusts” on all income – generally if the trust was created by a NJ resident or has a NJ trustee – and taxes nonresident trusts on NJ-source income.) |
| New Mexico | Yes | State Form FID-1 for trusts; NM K-1 issued to beneficiaries. |
| New York | Yes | Trust files NY Form IT-205 and gives beneficiaries a NY K-1 equivalent. New York considers a trust a resident trust if the decedent or grantor was a NY resident when the trust became irrevocable. However, NY law provides an exemption: if a resident trust has no NY assets, no NY-source income, and no NY resident trustee, it can be treated as a nonresident trust (meaning NY won’t tax its income). |
| North Carolina | Yes | Trusts file NC D-407; NC K-1 to beneficiaries. Note: North Carolina cannot tax a trust solely because a beneficiary lives in NC (per the U.S. Supreme Court’s Kaestner decision in 2019). NC will tax trust income if the trust is considered a NC resident (e.g. created by an NC resident grantor with no conditions like in Kaestner) or if the trust has NC-source income. |
| North Dakota | Yes | Trust files ND Form 38; ND Schedule K-1 issued to beneficiaries. |
| Ohio | Yes | State Form IT-1041 for trusts; OH K-1s to beneficiaries. (Ohio taxes trust income for resident trusts and source income for nonresident trusts. Beneficiaries may also need to consider Ohio school district taxes if applicable.) |
| Oklahoma | Yes | Trust files OK Form 513 (fiduciary return); OK K-1 issued to beneficiaries. |
| Oregon | Yes | Oregon Form OR-41 filed; OR Schedule K-1 issued to beneficiaries. (Oregon taxes resident trusts on all income and nonresident trusts on OR-source income. Oregon’s top trust tax rate is the same 9.9% that individuals pay.) |
| Pennsylvania | Yes | Trust files PA-41 with PA Schedule RK-1/NRK-1 to beneficiaries. (Pennsylvania taxes trust income at a flat 3.07%. Notably, PA does not tax a trust’s income distribution to a nonresident beneficiary if that income is from intangibles like stocks and bonds – only PA-source income would be taxable to the nonresident.) |
| Rhode Island | Yes | Trusts file RI-1041; RI K-1 provided to beneficiaries. |
| South Carolina | Yes | State Form SC1041 filed; SC K-1 to beneficiaries. |
| South Dakota | No | No state income tax (South Dakota is often used for “dynasty trusts” due to its lack of income tax). |
| Tennessee | No | No state income tax (Tennessee’s limited Hall Tax on interest/dividends was fully repealed by 2021). |
| Texas | No | No state income tax (no trust filing or K-1 needed in TX). |
| Utah | Yes | Trusts file UT TC-41; Utah Schedule K-1 provided to beneficiaries. |
| Vermont | Yes | State Form FI-161 filed for trusts; VT K-1 given to beneficiaries. (Vermont taxes trust income at the same rates as individual income.) |
| Virginia | Yes | Trust files VA Form 770; VA K-1 issued to beneficiaries. |
| Washington | No | No state income tax on trust income. (Washington’s new capital gains tax does not apply to trusts – only to individuals – so trusts in WA still pay no state income tax.) |
| West Virginia | Yes | Trusts file WV IT-141; WV K-1 issued to beneficiaries. |
| Wisconsin | Yes | State Form 2 filed by trust; WI Schedule 2K-1 given to beneficiaries. (Wisconsin requires reporting of any federal-to-state adjustments on the K-1.) |
| Wyoming | No | No state income tax (no state trust return or K-1). |
Tip: Because of these state differences, many people choose to establish trusts in states with no income tax or trust-friendly laws (like Delaware, Nevada, South Dakota, Alaska, etc.) to minimize state taxes. These states generally won’t tax trust income as long as the trust is structured to avoid local contacts (for example, no in-state beneficiaries). However, if you live in a high-tax state, your home state might still tax your trust income when it comes to you – you’d then claim a credit for any tax paid to the trust’s state. State taxation can get complicated, so it’s an important part of trust planning and compliance.
Real-Life Examples: How Trust K-1 Income Is Taxed
Let’s look at three simplified scenarios to see who pays the tax and who gets a K-1:
Scenario 1: Revocable Grantor Trust (No K-1 Needed) – John creates a revocable living trust and transfers his investments into it. In 2025, the trust earns $5,000 of interest, $2,000 of dividends, and $3,000 of capital gains. Because John’s trust is a grantor trust (revocable), John is treated as owning the assets for tax purposes. The trust does not issue any K-1 to John (he’s not a “beneficiary” in the tax sense – he’s the owner). Instead, John reports all that income directly on his own Form 1040, just as if he held those investments in his own name. If John’s children are named as beneficiaries to receive the trust assets after his death, they get nothing during John’s life – and thus no K-1 while the trust is revocable.
| Grantor Trust (John’s Revocable Trust) | 2025 Income | Taxable on John’s 1040? | K-1 Issued? |
|---|---|---|---|
| Interest Income | $5,000 | Yes (John reports it) | No |
| Dividend Income | $2,000 | Yes (John reports it) | No |
| Capital Gains | $3,000 | Yes (John reports it) | No |
| Total | $10,000 | John pays all taxes | No K-1 needed |
(In Scenario 1, the trust is essentially ignored as a separate taxpayer – John pays all the tax, and the IRS doesn’t require a K-1 because no one else is being taxed.)
Scenario 2: Simple Trust (All Income to Beneficiary) – After John dies, his trust becomes an irrevocable simple trust for the benefit of his daughter Alice. The trust’s investments earn $5,000 interest, $3,000 dividends, and $2,000 capital gains in 2025. By the trust’s terms, it must distribute all income to Alice each year. Here, “income” under the trust law means the interest and dividends ($8,000 total), but not the capital gains (gains are considered principal). So the trustee distributes $8,000 to Alice. The $2,000 of capital gains remain in the trust. For tax purposes:
The trust takes a distribution deduction for the $8,000 of income paid out to Alice.
Alice receives a K-1 showing $5,000 of interest and $3,000 of dividends. She will report those on her tax return (and they retain their character as interest and dividend income).
The trust will pay the tax on the $2,000 of capital gains it kept (since capital gains weren’t distributed, they are taxed to the trust).
Alice includes the interest and dividend income on her return, and the trust itself owes tax on the $2,000 of gains.
| Simple Trust (Irrevocable) | 2025 Income | Taxable to Trust? | Taxable to Alice (via K-1)? |
|---|---|---|---|
| Interest Income | $5,000 | No (paid out) | Yes – $5,000 |
| Dividend Income | $3,000 | No (paid out) | Yes – $3,000 |
| Capital Gains | $2,000 | Yes (retained) | No |
| Totals | $10,000 | Trust pays tax on $2,000 | Alice pays tax on $8,000 |
(In Scenario 2, Alice receives a K-1 for $8,000 of income (with $5k of interest and $3k of dividends listed). The trust’s Form 1041 shows $10k of total income, an $8k distribution deduction, and thus $2k of net taxable income which it pays tax on. Alice, as the beneficiary, pays the tax on the $8k she received.)
Scenario 3: Complex Trust (Partial Income Distribution) – Now consider a similar trust for Alice, but this time it’s a complex trust where the trustee has discretion on how much to distribute. In 2025, it again earns $5,000 interest, $3,000 dividends, and $2,000 capital gains (total $10k). The trustee decides to distribute only $4,000 to Alice this year and leave the rest in the trust (perhaps to reinvest or for future needs). Let’s assume that $4,000 comes out of the trust’s current income (interest/dividends), and none of the capital gains are distributed. The breakdown might be roughly half the interest and dividends paid out, half retained:
Alice gets $4,000 and a K-1 reporting about $2,500 of interest and $1,500 of dividends (her proportional share of the trust’s $8k of interest+dividend income).
The trust retains the other ~$2,500 of interest, ~$1,500 of dividends, plus all $2,000 of capital gains.
For tax purposes, the trust deducts the $4,000 distribution and is left with $6,000 of its income undistributed. The trust will pay tax on that $6,000.
Alice will pay tax on the $4,000 she received (per the K-1).
| Complex Trust (distributes partial income) | 2025 Income | Taxable to Trust (retained) | Taxable to Beneficiary (distributed) |
|---|---|---|---|
| Interest Income ($5k) | $5,000 | $2,500 retained → Yes | $2,500 → Yes (on K-1) |
| Dividend Income ($3k) | $3,000 | $1,500 retained → Yes | $1,500 → Yes (on K-1) |
| Capital Gains ($2k) | $2,000 | $2,000 retained → Yes | $0 (none paid out) |
| Totals | $10,000 | Trust pays tax on $6,000 | Beneficiary pays tax on $4,000 |
In Scenario 3, the K-1 to Alice would report $4,000 of taxable income (broken into the categories of interest and dividends). The trust’s Form 1041 shows $10k of income, a $4k distribution deduction, and $6k of taxable income remaining (on which the trust pays the tax). If in a later year the trustee decides to distribute some of the accumulated income or capital gains to Alice, that could carry out taxable income at that time (and generate a K-1 reflecting those amounts).
Pros and Cons of Receiving a Trust K-1
Every tax scenario has upsides and downsides. Here are some pros and cons of receiving income via a trust K-1:
| Pros of Receiving a Trust K-1 | Cons of Receiving a Trust K-1 |
|---|---|
| Avoids double taxation: Income distributed via K-1 is only taxed to the beneficiary (the trust deducts it), preventing the same income from being taxed twice. | Tax filing complexity: You have an additional tax form to deal with. K-1s can be confusing and may require careful entry on your tax return (possibly professional help to avoid mistakes). |
| Potential tax savings: Beneficiaries often have lower tax brackets than the trust (which hits 37% at a very low income level). By receiving a K-1, the income may be taxed at a lower rate on the beneficiary’s return. | Timing and delays: Trust K-1s frequently arrive later than W-2s or 1099s (especially if the trust files an extension). This can delay your tax filing or force you to file an extension while waiting. |
| Income in the right hands: The beneficiary gets the money and can use or invest it. The trust’s income isn’t “locked” inside paying high taxes – it’s in the beneficiary’s pocket, potentially at a lower tax cost. | No tax withholding: Unlike a paycheck, distributions reported on a K-1 usually come with no taxes withheld. Beneficiaries might need to pay quarterly estimates or risk an underpayment penalty when they file their return. |
| Pass-through of tax attributes: K-1s carry the character of income and sometimes credits/deductions to the beneficiary. For example, if the trust earned tax-exempt interest or qualified dividends, those keep their tax-favored status for the beneficiary. (Trusts can also pass out certain deductions like investment expenses or foreign tax credits to beneficiaries in some cases.) | Multi-state tax headaches: If the trust earned income in another state (or is itself based in another state), you might have to file an extra state tax return for that K-1 income. This means more forms and possibly paying tax to a state where you’re not a resident. |
| Flexible tax planning: Trustees can time distributions (e.g. using a 65-day rule) to push income into a year when a beneficiary’s tax situation is more favorable. Also, distributing to a charity beneficiary yields a deduction for the trust and no tax for the charity – a win-win. | Increased taxable income: Getting a large K-1 can bump up your adjusted gross income significantly. This can trigger phase-outs of tax benefits, higher Medicare premiums, or exposure to the 3.8% net investment income tax on your return. In other words, it can affect your overall tax picture, not just add straightforward income. |
FAQ: Common Questions about Trust K-1 Forms
Q: Do all trusts have to issue a Schedule K-1 to beneficiaries?
A: No. If a trust doesn’t have any taxable income to pass out (or is a grantor trust where the grantor pays all the tax directly), it may not issue any K-1s to beneficiaries.
Q: Will I get a K-1 from a revocable living trust?
A: No – not while the grantor is alive. A revocable living trust is a grantor trust, so all income is taxed to the grantor directly. No K-1s are issued to anyone else during that period.
Q: Are trust distributions taxable to the beneficiary?
A: Yes, if the distribution represents the trust’s income. If you receive trust income (reported on a K-1), you must pay tax on it. Distributions of the trust’s original principal (corpus) are not taxable to the beneficiary.
Q: Do I have to file a tax return if I get a K-1 from a trust?
A: Yes. A K-1 indicates you have taxable income to report. If the amounts on the K-1 exceed the IRS filing threshold (often as low as $600 of income), you are required to file a return and include that income.
Q: Do estates issue K-1 forms to beneficiaries like trusts do?
A: Yes. An estate that earns income will file Form 1041 and issue Schedule K-1 (Form 1041) to its beneficiaries for any income distributed (or required to be distributed) to them, just as a trust would.
Q: Is income from a trust K-1 considered “earned income”?
A: No. Trust K-1 income is unearned (investment) income. It doesn’t count as wages or self-employment earnings, so it does not qualify as earned income for things like IRA contributions or the Earned Income Credit.
Q: Am I liable if the trustee doesn’t file the trust tax return or send K-1s?
A: No. The trustee is responsible for filing the trust’s tax return and issuing K-1s. Beneficiaries aren’t penalized if a trustee fails to file – you just report any income on any K-1 you do receive.
Q: I received money from a trust but no K-1. Is that money tax-free?
A: Yes – usually if no K-1 was issued, it means the distribution wasn’t taxable income (e.g. it was a gift or a principal distribution). No K-1 generally = no taxable income for you in that case.
Q: Do I need to attach the K-1 form to my personal tax return?
A: No. Simply report the K-1 income on the appropriate lines of your Form 1040. You generally don’t send the K-1 itself with your return (the trust already filed it with the IRS). Keep the K-1 for your records.
Q: Did the trust already pay taxes on the income shown on my K-1?
A: No. If an amount is on your K-1, that means the trust did not pay tax on it – instead, the trust passed the income to you untaxed (and took a deduction). It’s now your responsibility to report and pay tax on that income.