We are going to address the subject of taxation on living trust distributions in this post. But first, we should explain some of the benefits that these trusts provide.
Simple Will Drawbacks
When you’re planning your estate, you obviously have to express your wishes with regard to the way you want your assets to be transferred. At the same time, you should consider the administration process that will take place after your passing.
If you use a simple will as your asset transfer vehicle, there is not a lot of flexibility. Unless you add a testamentary trust, the assets will be distributed to the beneficiaries in lump sums.
This may be fine for some people, but you could have a poor money manager in the family. Short of this, you may prefer to arrange for your loved ones to receive ongoing distributions over an extended period of time for your own reasons.
Probate
The inheritors must play a waiting game when a will is used because it would be admitted to the probate court. This is a time-consuming process that takes place under the supervision of a court.
An estate’s probate process typically takes eight to 18 months, depending on its complexity. No inheritances are distributed until the court has probated and closed the estate.
In addition to the time consumption, anyone who wants to pry into your final affairs can access probate records, and there are a number of expenses that reduce the value of the estate during this process.
Living Trust Alternative
With a living trust, the trustee that you name would be able to distribute assets more efficiently outside of probate. Plus, you would control the way the assets are transferred to the beneficiaries. So, you could allow for incremental distributions if you choose to do so.
Disability Protections and Planning for Married Couples
Many people shy away from trusts because they think that you no longer have access to the assets in your trust. This is simply not the case with a living trust. If you establish a living trust, you will be the trustee while you are alive. As a result, you would have control of the assets in every way.
Unfortunately, a significant percentage of elders become unable to make sound decisions at some point in time. Alzheimer’s and other forms of dementia are the leading culprits, but there are other causes of incapacity. To account for this, you can name a disability trustee to manage the trust if it ever becomes necessary.
A living trust can be a great estate planning tool for married couples that have jointly owned property that they want to leave to one another. Each person would still have the ability to direct their own separate property to beneficiaries of their choosing.
Taxes on Living Trust Distributions
Now that we have provided a bit of an overview, we can get to the point of this post.
Assets that you convey into a living trust were in your possession after you paid taxes on your income. There are no taxes on distributions of the principal because it would be an exercise in double taxation.
However, distributions of interest that are earned by assets in the trust would be looked upon as taxable income by the IRS and state tax authorities. Beneficiaries would pay taxes on distributed appreciation, and the trust itself would have to pay taxes on undistributed interest earnings.
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To get your copy, visit our worksheet page and follow the simple instructions.
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- What Is a Living Trust? - August 3, 2026
- A Basic Guide to Trusts in Estate Planning - July 31, 2026
- Don’t Outlive Your Money: Planning for Longevity Risk - July 27, 2026
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