Do Trust Funds Gain Interest?

When considering long-term wealth management strategies, many people wonder: do trust funds gain interest? The answer is yes, but with important nuances. Trust funds aren’t simply static accounts holding money but are sophisticated financial vehicles that can generate interest, dividends and capital appreciation depending on how they’re structured and invested. Unlike basic savings accounts, trust funds can hold diverse assets including stocks, bonds, real estate and other investments that may produce significant returns over time. The growth potential of a trust fund largely depends on its investment strategy, which is typically guided by the trust document’s provisions and the trustee’s decisions.

For help with forming or managing a trust fund, consider finding and working with a financial advisor who serves your area.

Do Trust Funds Gain Interest?

Trust funds can indeed gain interest and other forms of investment returns. When assets are placed in a trust, they don’t simply sit idle. The trustee, who manages the trust, typically invests these assets according to the trust’s terms and investment strategy. These investments can generate interest, dividends, capital gains and other forms of income that accumulate within the trust.

The answer of whether or not trust funds gain interest depends on what types of accounts and assets are held within the trust. Some accounts do gain interest, like a savings account or CD, while others, like real estate or collectibles, do not.

In simple terms, a trust fund is comparable to a retirement account or brokerage account. It is a way to hold items for the benefit of someone, yet the account itself doesn’t earn interest or change value. Only the assets within the trust fund can gain interest or provide other investment returns, not the trust fund itself.

How Are Trusts Taxed?

If your trust fund earns interest, dividends, capital gains or other returns, those distributions could be considered taxable. Who pays those taxes depends on what type of trust fund you have – revocable or irrevocable trust.

Revocable Trusts

A revocable trust is one where the trust creator can amend or revoke the trust at any time. This means that the creator has unrestricted control over the trust and can add or remove assets at any time. Only upon the creator’s death do the assets transfer to the beneficiaries. These types of trusts appeal to investors who want maximum control over their trust assets so they can change the terms of the trust as needed throughout their lives.

Income from a revocable trust is treated as income for the creator. With total control over the assets, the creator must also bear the burden of taxes due on any interest, dividends, capital gains or other payments. In other words, income from a revocable trust is “pass-through” income, similar to the way S-corporations or limited liability companies (LLC) operate.

Irrevocable Trusts

An irrevocable trust is like a one-way street. While the creator can control the assets within an irrevocable trust, once you transfer assets into the trust’s name, they cannot be easily removed. Because of this feature, investors often use irrevocable trusts to protect assets against lawsuits and collection efforts against the creator.

Since the creator cannot remove assets from an irrevocable trust, any gains on these assets are no longer the responsibility of the creator. All income generated by interest, capital gains, dividends and other sources is the responsibility of the irrevocable trust. The trust fund must file its own taxes and pay the taxes due. Each irrevocable trust has its own tax identification numbers for federal and state tax purposes.

Do Beneficiaries Pay Taxes?

When you receive an inheritance or are named as a beneficiary, understanding your tax obligations becomes crucial. While beneficiaries typically don’t pay inheritance taxes in most states, they may face income tax implications depending on the type of assets received and how they generate income. The tax treatment varies significantly based on whether you’ve inherited retirement accounts, life insurance proceeds or other assets.

Beneficiaries will claim the income distributions on their tax returns. However, any amount that is principal is generally not considered taxable income. The Internal Revenue Service (IRS) assumes that taxes were previously paid on assets placed into the trust. Once you place an asset into the trust, any income received is taxable either to the trust or beneficiaries.

How to Create a Trust Fund

A trust fund is a legal arrangement that allows a third party, known as a trustee, to hold and manage assets on behalf of a beneficiary. Creating a trust fund provides a structured way to transfer wealth while potentially offering tax advantages and ensuring your wishes are carried out. Trust funds aren’t just for the ultra-wealthy, they can be valuable estate planning tools for many families who want to protect assets and provide for loved ones.

Before establishing a trust fund, clarify what you hope to accomplish. Are you looking to provide for minor children, support a family member with special needs or minimize estate taxes? Perhaps you want to protect assets from creditors or ensure charitable giving continues after your lifetime. Your specific goals will help determine which type of trust is most appropriate for your situation.

Several trust types exist, each designed for different purposes. Revocable living trusts allow you to maintain control of assets during your lifetime while avoiding probate. Irrevocable trusts offer tax advantages but require surrendering control of assets. Special needs trusts help beneficiaries maintain government benefits, while charitable trusts support philanthropic goals. Consulting with an estate planning attorney can help identify which trust aligns with your objectives.

Choosing the right trustee is crucial to your trust’s success. This person or institution will manage trust assets and make distributions according to your instructions. Consider appointing someone who is financially responsible, trustworthy and willing to serve in this capacity. Some people select family members, while others prefer professional trustees like banks or trust companies that offer expertise but charge fees for their services.

Bottom Line

A man reviewing if trust funds gain interest.

If you are wondering do trust funds gain interest, the answer is “yes, it is possible.” However, they must hold assets that produce income. A trust fund is a type of account that holds a variety of assets for your beneficiaries. Some assets, like a savings account, produce interest, while others do not. Who pays taxes on your trust’s income depends on the type of trust you’ve created. Because of the complexities of this topic, it’s a good idea to discuss strategy with your financial advisor and tax professional to create a cohesive plan to meet your goals.

Tips for Investing Your Trust Fund Assets

To make a plan for your trust fund assets, you may want to seek advice from a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Investors who place assets into a trust fund often want the money to last for many years, possibly to last over multiple generations. In order to accomplish this goal, invest the assets wisely to earn more than planned distributions. SmartAsset’s investment calculator provides forecasts of how much you’ll earn based on your starting amount, additional contributions, returns and timeframe.