Yes, a trust account can earn interest, but the money does not grow by itself. A trust is a holding structure, so whether a trust account earns interest depends entirely on what the trustee does with the assets inside it. The same $500,000 can sit in a checking account earning nothing or generate tens of thousands a year across bonds, CDs, and dividend funds. What finally reaches a beneficiary depends on the investments chosen, the trust document, taxes, and fees.
What a Trust Has to Be Invested In to Earn Interest
A trust itself pays no interest. The trustee picks the investments, and each product generates a different kind of income. The common interest-producing holdings in trust portfolios include:
- Savings accounts and certificates of deposit. CDs lock funds in for a fixed term at a guaranteed rate; savings accounts pay less but stay liquid.
- Money market funds. These invest in short-term government and corporate debt. They are not bank deposits and carry no FDIC insurance, but they tend to pay slightly more than a standard savings account.
- Bonds and Treasury securities. Corporate bonds, municipal bonds, and U.S. Treasuries all pay periodic interest. Treasuries are backed by the federal government; corporate bonds carry credit risk that varies by issuer. Municipal bond interest is often exempt from federal income tax, which matters a great deal given how trusts are taxed.
- Dividend-paying stocks and equity funds. Stocks are held mainly for growth, but many pay dividends that count as trust income. Qualified dividends get more favorable tax treatment than ordinary interest.
Most trusts hold a mix. The balance between income-producing assets and growth investments depends on the trust’s purpose, the beneficiaries’ needs, and how long the trust is expected to last.
The Trustee Has to Invest the Money
Trustees are not just allowed to invest trust assets. They are legally required to. Under the Uniform Prudent Investor Act, adopted in some form by nearly every state, a trustee must manage the portfolio as a whole, diversify across asset classes, balance risk against expected return, and consider both income beneficiaries who need cash now and remainder beneficiaries who inherit what is left.
Leaving a large trust in a non-interest-bearing checking account for years is arguably a breach of fiduciary duty even if nothing is stolen. Beneficiaries can bring a surcharge action asking a court to make the trustee personally pay the income the trust would have earned under a reasonable strategy. A court can also remove a negligent trustee and appoint a replacement.
So if you are a beneficiary and the trust is sitting in cash earning nothing, that is worth raising with the trustee. If you are the trustee, parking the money indefinitely is one of the fastest routes to personal liability.
Who Actually Gets the Interest
Once interest is earned, the trust document controls who receives it. Trust accounting draws a hard line between “income” and “principal” (also called corpus).
In the traditional framework, bond interest, ordinary dividends, and rental income are income. The original assets contributed to the trust, plus any capital gains from selling them at a profit, are principal. A trust with a life beneficiary and remainder beneficiaries typically pays all interest and dividends to the life beneficiary each year, while principal grows for whoever inherits later.
That split creates tension. Loading up on bonds boosts current interest for the life beneficiary but starves 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 Alternative
Many states now allow a “unitrust” or total return approach that sidesteps the income-versus-principal divide. Instead of paying out whatever interest and dividends happen to show up, the trustee distributes a fixed percentage of the trust’s total value each year, regardless of whether the return came from interest, dividends, or capital gains. The annual rate is typically set within a statutory range of three to five percent of the trust’s average net value. Distributions become more predictable, and the trustee can invest for the best overall return without worrying about how gains are labeled.
How the Interest Gets Taxed
Tax treatment starts with whether the IRS considers the trust a grantor trust or a non-grantor trust. The distinction has large consequences.
Grantor Trusts
When the grantor keeps enough control, such as the power to revoke the trust, direct investments, or benefit from the income, the IRS ignores the trust as a separate tax entity. All interest and other income are reported directly on the grantor’s Form 1040 under their Social Security number. Every revocable living trust works this way, and many irrevocable trusts qualify too depending on their terms.1Internal Revenue Service. Abusive Trust Tax Evasion Schemes – Questions and Answers The trust generally does not file a separate 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 Compressed Brackets
A non-grantor trust, typically irrevocable, files its own Form 1041 and pays tax on any income it does not distribute.3Internal Revenue Service. About Form 1041, U.S. Income Tax Return for Estates and Trusts This is where retained interest gets expensive. Trusts hit the top federal brackets at income levels that would barely register on an individual return. 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 reach 37% until income exceeds roughly $626,000. A trust gets there at $16,000. Retained interest income is taxed at these compressed rates, which is why trustees generally push income out to beneficiaries rather than accumulating it inside the trust.
The 3.8% Net Investment Income Tax
Trusts also face the 3.8% net investment income tax on retained earnings. For individuals the surtax starts at $200,000 of modified adjusted gross income ($250,000 for married couples). For trusts and estates in 2026, it starts at the same $16,000 threshold where the 37% bracket begins.5Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Retained trust interest income above $16,000 can face a combined federal rate of 40.8% before state income tax, which is the single biggest reason trustees distribute income rather than hold it.
How the Tax Shifts to Beneficiaries
The mechanism that moves the tax from the trust to its beneficiaries is Distributable Net Income, or DNI. When the trustee distributes interest income, the trust takes a deduction on Form 1041 and the beneficiary picks up the tax on their personal return.6Office of the Law Revision Counsel. 26 USC 643 – Definitions Applicable to Subparts A, B, C, and D
The beneficiary receives a Schedule K-1 showing the character of what came through: ordinary interest, qualified dividends, tax-exempt interest, and so on. Each type keeps its character on the beneficiary’s return, so tax-exempt municipal bond interest from the trust remains tax-exempt in the beneficiary’s hands.7Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1
Fees That Come Out Before the Interest Reaches You
Trust expenses take their cut before any interest reaches a beneficiary. Trustee compensation alone typically runs between 0.5% and 2% of trust assets a year, depending on size, complexity, and whether the trustee is a professional institution or an individual. A corporate trustee on a $1 million trust at 1% charges $10,000 a year, which can exceed the interest earned on the conservative portion of the portfolio.
Beyond the trustee’s fee, a trust may pay investment advisory fees, Form 1041 preparation, legal fees, and accounting charges. A trust earning 4% interest on a $500,000 bond allocation generates $20,000 a year. After a 1% trustee fee ($5,000), tax preparation ($1,500 to $3,000), and any advisory charges, the net reaching beneficiaries may be closer to $12,000 to $13,000. Beneficiaries who think the fees are unreasonable relative to earnings can petition a court to review the trustee’s compensation.
FDIC Coverage on Trust Bank Deposits
When trust assets sit 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, for example, has up to $750,000 of FDIC coverage at a single bank. The actual allocation among beneficiaries in the trust document does not change the calculation; it depends on the number of eligible beneficiaries named. Larger trusts that prioritize safety of principal often spread deposits across multiple banks to stay inside insured limits.