David W. Hanson, Tax Practitioner, Income Taxation of Trusts

First, the receipt of your interest (or the interests of your children) in the trust does not constitute the receipt of gross income for federal income tax purposes. However, subsequent income distributions from the trust will constitute income for federal income tax purposes.
The trust is a taxable entity and, therefore, must file a federal income tax return and pay tax on its net income. The trustee is responsible for the filing of this tax return.
In computing its taxable income, a trust is subject to most of the same rules which are applicable to individuals in determining what constitutes gross income and available deductions, except that trusts are not subject to the limits on itemized deductions as individuals are. Some minor adjustments are required since the trust is an artificial entity, rather than a natural person. Further, the trust is entitled to a deduction for the distributions made to the trust beneficiaries. Under such circumstances, the income tax responsibility is shifted from the trust to the beneficiaries who receive the income.
The trustee must inform you, as the beneficiary, (with an IRS Form 1041, Schedule K-1) of your share of the trust's income, deductions and credits. This will enable you to properly report the income derived from the trust.
This is only a very abbreviated summary of the trust income tax system. If I can provide further details, please let me know.

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