K-1 Tax Form for an Inheritance: What Beneficiaries Owe

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

A Schedule K-1 (Form 1041) is the form an estate or trust sends you when it passes income to you as a beneficiary. The inheritance itself is generally not taxable income, but the interest, dividends, rent or gains the inherited assets earn after death are, and the K-1 tells you how much of that income is yours to report on your own Form 1040. For a calendar-year estate or trust, the return and your K-1 are due by April 15 of the following year, and a trust that extends can send it months later.

For a two-income household earning $750,000 to $3 million, the K-1 usually lands on top of wages and RSU income that already sit in the 35% or 37% federal bracket. That changes the usual advice about whether trust income should be paid out to beneficiaries or kept inside the trust. This guide covers what the form shows, how it is taxed at your income in California and Washington, and the decisions a family actually has to make.

What inherited money is taxed, and what is not

The IRS treats property you inherit as not taxable to you when you receive it, though income the property produces afterwards is (IRS, Gifts and inheritances). An estate or trust is a separate taxpayer. While it holds your parent’s brokerage account, rental property or business interest, the income those assets earn is reported on Form 1041. The estate or trust then either pays tax on that income itself or passes it through to beneficiaries, who pay the tax instead. The K-1 is the record of what was passed through.

Three things do not come to you on a Form 1041 K-1:

• The principal itself. Receiving the house, the shares or the cash your parent left is not income.
• Inherited retirement accounts left to you by name. Withdrawals from an inherited IRA or 401(k) are reported on Form 1099-R. They reach a K-1 only if the account was left to a trust or to the estate and the trust or estate passes the income out.
• A living trust’s income while the parent is alive. A revocable trust is a grantor trust, so its income goes on the parent’s own return. It starts filing Form 1041 after the grantor dies (Instructions for Form 1041).

How trust income flows through to your 1040

The key number is distributable net income (DNI), which caps how much of any distribution is taxable to you. If the trust earned $60,000 and paid you $100,000, roughly $60,000 is taxable and the rest is a tax-free distribution of principal. If it earned $60,000 and paid you nothing, the trust pays the tax.

The income keeps its character when it passes through. The Form 1041 instructions say your share carries the same mix of income types as the trust’s DNI, so if the trust’s income was half dividends and half interest, so is yours. Qualified dividends stay qualified. Tax-exempt municipal bond interest stays tax-exempt. That means the old line that “trust distributions are taxed as ordinary income” is wrong.

Capital gains usually stay inside the trust and are taxed there. They pass to you mainly in the trust’s final year, or when the trust document or the trustee’s consistent practice treats them as distributed (Treas. Reg. §1.643(a)-3).

The K-1 boxes you will actually see

For line-by-line placement, see our guide on where K-1 income goes on the 1040.

Why keeping income in the trust costs more than it looks, and paying it out may not help you

Trusts hit the top federal rate fast. For 2026, a trust pays 37% on taxable income over $16,000, and its qualified dividends and long-term gains reach the 20% rate above $16,250 (Rev. Proc. 2025-32). A married couple does not reach 37% until $768,700 of taxable income. The trust also owes the 3.8% net investment income tax on undistributed investment income above the point where its top bracket starts (IRC §1411).

That is why the standard advice is to distribute trust income to beneficiaries, who are usually in lower brackets. For a family already in the 37% bracket, the math is different.

Worked example: a $850,000 household in San Jose inherits through a trust

Assumptions (illustrative): married couple filing jointly, $850,000 of W-2 wages and RSU income, two children aged 6 and 9. After the husband’s mother died, her irrevocable trust holds a portfolio earning $60,000 in 2026: $20,000 of taxable interest and $40,000 of qualified dividends. The trust is a complex trust with a $100 exemption. Trustee fees are ignored to keep the math clean. Federal taxable income before the trust income is about $817,800 ($850,000 minus the $32,200 standard deduction for 2026).

At this income, paying the income out costs the family about $2,700 more in federal tax, not less. The couple’s wages and RSUs have already used up every bracket the trust would otherwise be shielding. Distributing still makes sense when the family needs the cash, when the trust document requires it, or when another beneficiary is in a lower bracket. It is not an automatic tax win.

Paying it to the children instead helps only a little. For 2026, the first $1,350 of a child’s unearned income is tax-free, the next $1,350 is taxed at the child’s rate, and anything over $2,700 is taxed at the parents’ rate under the kiddie tax (Rev. Proc. 2025-32). Two young children can absorb about $5,400 at low rates. The rest is taxed as if the parents earned it. Our UTMA tax rules guide walks through the same kiddie tax mechanics for custodial accounts.

California and Washington: what changes at the state level

California. A California resident pays state tax on K-1 income at ordinary rates, and California has no lower rate for capital gains or qualified dividends (FTB). In the example, if the couple’s California taxable income is around $800,000, the $60,000 falls in the 10.3% bracket on the 2025 schedule (2026 rates are not yet published), adding about $6,180. Keeping the income in the trust does not necessarily avoid California either. California taxes a trust’s retained income based on where its trustees and noncontingent beneficiaries live (if all of either are California residents, the trust is taxed on all its income), plus any California-source income. A trust files Form 541 and sends its own Schedule K-1 (541) by April 15 for calendar-year trusts (FTB Form 541 instructions).

Washington. Washington has no tax on wages or ordinary investment income for 2026, so K-1 interest and dividends are federal-only. Long-term capital gains may count toward Washington’s capital gains tax, which is 7% on gains above the standard deduction ($278,000 for 2025, the latest published figure) and 9.9% on taxable gains over $1,000,000 (WA DOR). Washington has also enacted a 9.9% income tax on AGI over $1,000,000 starting in 2028 (WA DOR), so a large K-1 received from 2028 on may be taxed at the state level.

Step-up in basis: why a trust’s sale of inherited stock is often nearly tax-free

Property inherited from a decedent generally takes a basis equal to its fair market value at the date of death (IRS Publication 551). The step-up applies to property acquired from a decedent, which includes assets in a revocable trust the parent could change until death. Assets a parent gave to an irrevocable trust during life, as a completed gift, generally do not get a step-up if they are not included in the parent’s gross estate (Rev. Rul. 2023-2), so ask the trustee which basis applies. It is not reported on the K-1 as a deduction. It shows up as a smaller gain when the asset is sold.

Example: your mother bought shares for $50,000 that were worth $800,000 when she died. The estate sells them months later for $810,000. The taxable gain is $10,000, not $760,000. Whether that $10,000 lands on your K-1 or stays with the estate depends on the rules above. Ask the executor for the date-of-death values in writing, because you need them for any asset you receive in kind and sell later.

When your K-1 arrives, and why it is often late

For calendar-year estates and trusts, Form 1041 and the K-1s are due April 15 of the following year, so April 15, 2027 for the 2026 tax year. The fiduciary can take an automatic 5½-month extension on Form 7004 (Instructions for Form 1041). This is later than the March 15 date that applies to partnership K-1s, which is a common source of confusion. Estates also choose their own tax year, which can end in any month.

In practice, a K-1 from an estate that is still valuing assets often arrives in late summer. If you expect one, plan to extend your own return rather than file and amend. If the trust is making a large distribution, your employer’s withholding on wages and RSUs will not cover that extra tax, so ask your CPA about an estimated payment. See when you should receive your K-1 for the timing across K-1 types.

Decisions to raise with the trustee and your CPA

1. Distribute or retain this year? Run the numbers both ways at your actual bracket, as in the example. A trustee can elect to treat distributions made within 65 days after year end as made in the prior year, which gives time to decide after the income is known.
2. Who receives distributions? If the trust allows several beneficiaries, a sibling in a lower bracket may pay much less tax on the same dollars. That is a family conversation, not only a tax one.
3. What is the final-year plan? Leftover legal and trustee fees and unused capital losses can pass to beneficiaries in the year the estate or trust closes (box 11). Timing the close can matter.
4. Which assets to take in kind? Taking stepped-up shares instead of cash can make sense if you plan to hold them, but it concentrates risk in whatever your parent owned.

What to write down for your own children

Most of the confusion around a K-1 comes from not knowing what the parent intended: why the trust holds what it holds, why it pays one child and not another, who the trustee is and why. The same will be true when your children inherit from you. A one-page note kept with your estate documents helps: which accounts go to a trust, who the trustee is, what the trust is meant to pay for (school, a first home, a floor of support), and what you hope your children learn from managing it. As Kevin Luu puts it: “Your kids will inherit your money. Will they inherit your judgment?”

Our estate planning and tax management pages explain how Age Five Family Office™ families organize this, and the FamilyKnowledge® Library is where those decisions are recorded.

Frequently asked questions

Do I have to pay tax on money I inherit from a trust?

Not on the inherited principal. You pay tax only on the part of a distribution that carries out the trust’s income for that year (its DNI), and the K-1 shows that amount by type. A distribution larger than the trust’s income for the year is generally a tax-free return of principal. Specific gifts of a fixed sum or specific property, paid all at once or in three or fewer installments, are generally not taxed to you either.

Is a K-1 from a trust taxed like a K-1 from a partnership?

No. A partnership K-1 reports your share of the partnership’s income whether or not you received cash, and it is due by March 15 for calendar-year partnerships. A trust or estate K-1 reports only income that was distributed or required to be distributed to you, and it is due by April 15. For how partnership K-1s are taxed, see our guide on the tax rate on K-1 income.

Is K-1 income from a trust earned income?

Generally no. Interest, dividends and capital gains passed through a trust are investment income. They do not count as earned income for a Roth IRA contribution, and for households over $250,000 of modified adjusted gross income (married filing jointly) they are usually subject to the 3.8% net investment income tax on top of regular tax for 2026.

Next step

When the first K-1 arrives, put it next to your last year’s return and ask your CPA one question: at our bracket, would this income have cost less inside the trust? If you would like a second set of eyes on the numbers, the Tax & Wealth Assessment takes a few minutes. This is general education, and the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

Connect on LinkedIn →  · About Kevin