Inherited money from a trust may or may not be subject to income tax, depending on the source of the funds. Property or money held by the decedent at the time of death is an inheritance and would not be subject to income tax, according to IRS Publication 559.
If the inheritance generates income in the form of capital gains, interest, dividends or rent, that income would be subject to income tax. While the assets remain in a trust, the tax burden lies with the trust. If there are distributions of money, any distributed income becomes taxable to the recipient. The recipient relies on information from the trustee to determine what needs to be reported as income and what is tax-exempt inheritance, according to IRS Publication 17.
