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Someone creates an irrevocable trust on behalf of someone. It is funded by a large amount of money that will be invested. The beneficiary will receive the profits/interest from the trust but not the whole amount.

Who is responsible for the income taxes of the money in the trust? The donor, the trust itself or the beneficiary.

It seems to me that the beneficiary should only be taxed on the amount he/she receives. So who pays for the rest?

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First, I am assuming that this is not a defective trust. That is, it counts as a trust for both income tax purposes and estate tax purposes. I am also assuming that you are in the United States.

The beneficiary will normally pay income tax on the profits that are distributed from the trust. If the trust fails to distribute all the profits, then the trust must pay income tax. Typically, the trust will have a higher income tax rate then the beneficiary.

Note: if the trust is defective then it does not count as a trust for income tax purposes and therefore the grantor must pay the income tax.

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  • 1
    What would a "defective trust" be? What makes it defective? – user92101 Jan 15 at 23:32
  • In the laws of the United States, there are two definitions of a trust. One of them is in the Income tax laws and the other definition is in the estate tax laws. If a trust meets the definition of a trust as defined in the estate laws but not as defined in the income tax laws then it is said to be defective. – Bob Jan 15 at 23:37

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