Yes, a trust account can earn interest, but only if the trustee invests the assets in something that pays it. The trust itself is a legal container, not an investment, so a trust holding cash in a non-interest-bearing checking account earns nothing, while the same balance placed in CDs, bonds, money market funds, or dividend-paying securities can produce steady income. How much reaches the beneficiaries depends on the investments chosen, the fees charged, and the tax rules that apply to trust income.
How the Interest Gets Generated
The trustee decides where the money goes. Common interest-producing choices inside a trust portfolio include savings accounts and certificates of deposit, money market funds, U.S. Treasury securities, corporate and municipal bonds, and dividend-paying stocks or equity funds. Each carries a different mix of yield, risk, liquidity, and tax treatment. Municipal bond interest, for example, is often exempt from federal income tax, which matters more inside a trust than it might for an individual because of how heavily trust income is taxed.
Most trust portfolios blend several of these. The balance between income-producing assets and growth investments depends on the trust’s purpose, how long it is expected to last, and the needs of the people it supports.
The Trustee Has to Invest, Not Just Hold
Trustees are legally required to invest trust assets, not merely safeguard them. Under the Uniform Prudent Investor Act, adopted in some form by nearly every state, the trustee must manage the portfolio as a whole, diversify across asset classes, and weigh risk against expected return with both current beneficiaries and remainder beneficiaries in mind.
Leaving a large trust in a non-interest-bearing checking account for years can be a breach of fiduciary duty even if nothing is stolen. Beneficiaries can bring a surcharge action asking a court to make the trustee pay damages personally for the income the trust should have earned, and a court can remove and replace a negligent trustee. If you are a beneficiary and your trust is sitting idle in cash, that is worth raising. If you are a trustee, parking assets indefinitely is one of the quickest routes to personal liability.
Who Actually Receives the Interest
Once interest is earned, trust accounting decides where it goes. The rules draw a hard line between “income” and “principal” (also called corpus), and the trust document controls how each is defined and distributed.
In the traditional framework, bond interest, ordinary dividends, and rental payments are income. The original assets placed into the trust, plus any capital gains from selling those assets at a profit, are principal. A trust with a life beneficiary and remainder beneficiaries typically pays out interest and dividends to the life beneficiary each year while principal grows for whoever inherits later.
That creates tension. Investing heavily in bonds boosts current interest for the income beneficiary but slows principal growth for the remainder beneficiaries. Investing for growth does the opposite. The trustee’s duty of impartiality requires a fair approach to both groups.
The Unitrust or Total Return Option
Many states now allow a “unitrust” or total return approach. Instead of paying out whatever interest and dividends the trust happens to earn in a given year, the trustee distributes a fixed percentage of the trust’s total value, typically set within a statutory range of three to five percent of the trust’s average net value. Gains that show up as capital appreciation count the same as gains that show up as interest, which frees the trustee to invest for the best overall return and gives beneficiaries a more predictable payout year to year.
How Trust Interest Is Taxed
Tax treatment depends first on whether the IRS treats the trust as a grantor trust or a non-grantor trust. The difference is enormous.
Grantor Trusts
When the person who created the trust keeps enough control, such as the power to revoke it, direct investments, or receive the income, the IRS ignores the trust as a separate entity. All interest and other income are reported on the grantor’s personal Form 1040 under the grantor’s Social Security number. Every revocable living trust works this way, and many irrevocable trusts qualify as well.1Internal Revenue Service. Abusive Trust Tax Evasion Schemes – Questions and Answers The trust generally does not have to file its own return as long as the grantor reports everything.2Office of the Law Revision Counsel. 26 USC 671 – Trust Income, Deductions, and Credits Attributable to Grantors and Others as Substantial Owners
Non-Grantor Trusts and the Compressed Brackets
A non-grantor trust, typically irrevocable, files its own return on Form 1041 and pays tax on any income it does not distribute to beneficiaries.3Internal Revenue Service. About Form 1041, U.S. Income Tax Return for Estates and Trusts Trust tax brackets are steeply compressed. For 2026:4Internal Revenue Service. Rev. Proc. 2025-32
- 10% on the first $3,300 of taxable income
- 24% from $3,301 to $11,700
- 35% from $11,701 to $16,000
- 37% on everything above $16,000
An individual filer does not hit the 37% bracket until income exceeds roughly $626,000. A non-grantor trust hits it at $16,000. Retained interest income gets taxed at these rates, which is why trustees usually distribute income rather than accumulate it.
The 3.8% Net Investment Income Tax
Trusts also face a 3.8% net investment income tax on retained investment earnings. For individuals, the surtax starts at $200,000 of modified adjusted gross income ($250,000 for a married couple). For trusts in 2026, it kicks in at the same $16,000 threshold where the 37% bracket begins.5Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Retained interest above that threshold can face a combined federal rate of 40.8% before state tax. This is the single biggest reason trustees push income out to beneficiaries.
Passing Interest Through to Beneficiaries
The mechanism for shifting tax from the trust to a beneficiary is Distributable Net Income, or DNI. When the trustee distributes interest, the trust claims a deduction on Form 1041, and the tax obligation moves to the beneficiary’s return.6Office of the Law Revision Counsel. 26 USC 643 – Definitions Applicable to Subparts A, B, C, and D Each beneficiary receives a Schedule K-1 showing the character of the income. Ordinary interest stays ordinary interest, tax-exempt municipal interest stays tax-exempt, qualified dividends stay qualified.7Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1
Fees Reduce What Beneficiaries See
Trust expenses come off the top before interest reaches anyone. Trustee compensation typically runs between 0.5% and 2% of trust assets annually, depending on the trust’s size, complexity, and whether the trustee is a professional institution or an individual. A corporate trustee at 1% on a $1 million trust charges $10,000 a year, which can easily exceed the interest earned on the conservative portion of the portfolio.
Add investment advisory fees, tax preparation for Form 1041, legal fees, and accounting charges. Investment advisory fees that would be typical for an individual investor are generally not deductible by the trust; only the portion exceeding what an individual would normally pay qualifies as a deduction.7Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1
The compounding effect matters. A trust earning 4% interest on a $500,000 bond allocation generates $20,000 a year. After a 1% trustee fee, $1,500 to $3,000 for tax preparation, and any advisory charges, net income to beneficiaries may be closer to $12,000 or $13,000. Beneficiaries who consider the fees unreasonable relative to the trust’s earnings can petition a court to review the trustee’s compensation.
FDIC Coverage on the Bank Portion
When the trustee places assets in bank products like savings accounts or CDs, FDIC coverage works differently than for a personal account. Trust deposits are insured at $250,000 per eligible beneficiary, up to a maximum of $1,250,000 for trusts with five or more beneficiaries.8Federal Deposit Insurance Corporation. Trust Accounts
A revocable trust naming three beneficiaries has up to $750,000 in coverage at a single bank. The actual allocation of funds among beneficiaries in the trust document does not change the calculation; it is based purely on the number of eligible beneficiaries named. Larger trusts often spread deposits across multiple banks when safety of principal is a priority.
None of this coverage applies to money market funds, bonds, or stocks held through a brokerage. FDIC insurance only reaches actual bank deposits, so the trustee has to think about protection differently for the invested portion of the portfolio.