Yes, In Trust For bank accounts are taxable, but the tax bill lands in different places at different times. While the grantor is alive, every dollar of interest or dividends the account earns is taxed on the grantor’s personal return. When the grantor dies, the full balance is counted in their estate, though the federal exemption sits at $15 million for 2026, so most estates owe nothing at the federal level. The beneficiary who inherits the money pays no federal income tax on the balance itself.
Who Pays Income Tax While the Grantor Is Alive
An ITF account, sometimes called a Totten trust or payable-on-death account, is fully revocable. The grantor can change the beneficiary or drain the account tomorrow. Because that control never leaves the grantor’s hands, the IRS treats the account as the grantor’s own property. Interest, dividends, and any other income are reported under the grantor’s Social Security number and flow onto the grantor’s Form 1040 like any other personal account.{1Office of the Law Revision Counsel. 26 USC 671 – Trust Income, Deductions, and Credits Attributable to Grantors and Others as Substantial Owners
This is true whether the money stays in the account or gets pulled out. Savings interest and CD interest are ordinary income at the grantor’s marginal rate. If the ITF sits on a brokerage account, dividends and capital gains are the grantor’s problem too. The income also counts toward the thresholds that depend on total income, including the 3.8% Net Investment Income Tax.
Withdrawals by the grantor have no tax consequence on their own. There is no distribution happening. The grantor is taking their own money. The named beneficiary has no ownership stake and no tax liability during this period.
If the grantor dies part way through the year, the estate reports the income the account earned from January 1 through the date of death on the grantor’s final Form 1040.
What Happens at the Grantor’s Death
The entire balance of the ITF account goes into the grantor’s gross estate for federal estate tax purposes. The reason is direct: the grantor had the power to revoke the beneficiary designation right up until death, which makes the account a revocable transfer under federal law.{2Office of the Law Revision Counsel. 26 USC 2038 – Revocable Transfers
For 2026, the federal estate tax exemption is $15 million per individual.{3Internal Revenue Service. Whats New – Estate and Gift Tax Everything the grantor owned, including ITF accounts, retirement plans, real estate, and other property, has to add up past that number before federal estate tax applies. Married couples can shelter roughly $30 million between them. Most people with ITF accounts will never see a federal estate tax bill.
Step-Up in Basis Rarely Helps a Cash ITF
Assets passing through a decedent’s estate get a basis reset to fair market value on the date of death.{4Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent Unrealized capital gains that built up during life are wiped out. A stock bought for $10,000 and worth $100,000 at death has a new basis of $100,000 in the beneficiary’s hands, and an immediate sale produces no taxable gain.
For most ITF accounts, this changes nothing. A dollar in a savings account or CD is worth a dollar, with no built-in gain to reset. The step-up only becomes useful when the ITF sits on a brokerage account holding appreciated stocks, bonds, or mutual funds.
What the Beneficiary Owes
The inherited balance is not income to the beneficiary. Federal law excludes property received by inheritance from gross income.{5Office of the Law Revision Counsel. 26 US Code 102 – Gifts and Inheritances Whether the account holds $5,000 or $5 million, the amount inherited does not go on the beneficiary’s Form 1040.
Income earned after the grantor’s death is different. Interest that accrues between the date of death and the day the funds reach the beneficiary belongs to the beneficiary and gets reported on their return for the year they receive it.
One point that surprises families: the ITF beneficiary designation controls the money regardless of what the will says. A will leaving “all bank accounts to my daughter” does not override an ITF account naming a nephew. The nephew gets the account. Funds pass directly to the named beneficiary outside probate, so the will never touches them. Keeping the beneficiary designation aligned with the rest of the estate plan avoids that outcome.
State Estate and Inheritance Taxes
The federal exemption is generous. State-level rules often are not. About a dozen states and the District of Columbia impose their own estate tax, sometimes with thresholds starting around $1 million to $2 million, well below the federal figure.
Five states charge an inheritance tax paid by the recipient rather than the estate: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland has both. Rates depend on the beneficiary’s relationship to the deceased. Spouses are typically exempt. Children and direct descendants pay lower rates but are not always fully exempt. Pennsylvania, for example, taxes transfers to children and grandchildren at 4.5%, siblings at 12%, and unrelated beneficiaries at 15%. An ITF account passing to a friend or distant relative can generate a real tax bill for the recipient.
The grantor’s state of residence at death generally decides which state’s rules apply, not the beneficiary’s. Check the law of the state where the grantor lived.
Gift Tax If Money Moves During the Grantor’s Life
If the grantor pulls funds out of an ITF account and hands them to the beneficiary while still alive, that transfer is a gift under federal tax rules. For 2026, the annual gift tax exclusion is $19,000 per recipient.{3Internal Revenue Service. Whats New – Estate and Gift Tax Gifts up to that amount, to any number of people, require no gift tax return.
Anything above $19,000 to a single recipient in one year means the grantor files IRS Form 709, even if no tax is due. The excess eats into the grantor’s $15 million lifetime estate and gift tax exemption. No actual gift tax is owed until that lifetime amount is used up. The recipient never owes income tax on a gift, whatever the size.
Payments the grantor makes directly to a medical provider or educational institution for someone’s benefit sit outside the gift tax rules entirely and do not count against either the annual or lifetime exclusion.
Non-Resident Alien Grantors
The rules change sharply if the ITF account owner is a non-resident alien. On the income side, interest on U.S. bank deposits is generally exempt from U.S. tax for non-residents, provided the account is not connected to a U.S. business. The non-resident grantor should file a W-8BEN with the bank to make sure the bank treats the account correctly.
The estate side is harsher. Non-resident aliens get only a $60,000 federal estate tax exemption, versus $15 million for U.S. citizens and residents.{6Internal Revenue Service. Frequently Asked Questions on Estate Taxes for Nonresidents Not Citizens of the United States There is a meaningful carve-out, though. U.S. bank deposits not connected to a U.S. trade or business are treated as situated outside the United States and are excluded from a non-resident’s taxable estate. A plain ITF savings account can therefore escape U.S. estate tax entirely for a non-resident grantor, even though the same account would be pulled into the estate of a U.S. citizen.