Are In Trust For (ITF) Bank Accounts Taxable?
Understand the tax implications of an In Trust For (ITF) account. Tax responsibility for earnings and the final inheritance shifts from the owner to the beneficiary.
An “In Trust For” (ITF) account is a financial tool where one individual, the trustee, manages funds for another person, known as the beneficiary. These accounts are commonly referred to as “Payable-on-Death” (POD) accounts or “Totten trusts,” reflecting their primary function: to transfer the account’s assets to the named beneficiary upon the trustee’s death. This structure allows for a direct transfer of funds outside of the often lengthy probate process.
Annual Income Tax Liability
During the lifetime of the person who opened the account, referred to as the grantor or trustee, they maintain complete control over the funds. This includes the ability to deposit, withdraw, or even close the account entirely without notifying the beneficiary. Because of this retained control, the Internal Revenue Service (IRS) views the account’s assets as still belonging to the grantor for income tax purposes. Consequently, any income generated by the account, such as interest or dividends, is taxable to the grantor.
The financial institution holding the funds will associate the grantor’s Social Security Number with the account. At the end of each tax year, the bank will issue a Form 1099-INT for interest income or a Form 1099-DIV for dividend income directly to the grantor. The beneficiary does not receive any tax forms and has no reporting obligation while the grantor is alive.
It is the grantor’s responsibility to report this income on their personal federal income tax return. The interest or dividend amounts shown on the 1099 forms must be included with the grantor’s other income on their Form 1040. This income is taxed at the grantor’s individual marginal tax rate for that year.
Gift and Estate Tax Considerations
When a grantor deposits money into an ITF account, it is not considered a completed gift to the beneficiary. The primary reason is the revocable nature of the account; since the grantor can withdraw the funds at any time, the transfer of ownership is not final. The gift is only considered “complete” for tax purposes at the moment of the grantor’s death, when the beneficiary gains control of the funds.
This means that the annual gift tax exclusion, which for 2025 allows an individual to give up to $19,000 to any other person without tax consequences, does not apply to deposits into an ITF account. A grantor can deposit more than this amount without needing to file a gift tax return (Form 709) because a taxable gift has not yet occurred.
Upon the grantor’s death, the full market value of the ITF account is included in the value of their gross estate for federal estate tax purposes. This is because the grantor retained full control and enjoyment of the assets throughout their life. The value of the ITF account is combined with the grantor’s other assets, such as real estate and investments, to determine the total value of the estate.
For the vast majority of individuals, this will not result in any tax being owed. The federal estate tax exemption is a substantial amount, set at $13.99 million per person for 2025. An estate will only owe federal estate tax if its total value exceeds this high threshold.
Tax Implications for the Beneficiary
Once the grantor passes away, the tax responsibilities associated with the account shift to the beneficiary. The initial transfer of the account’s principal balance to the beneficiary is not considered taxable income at the federal level. This means the beneficiary can receive the inherited funds without having to report the amount on their personal income tax return.
From that point forward, any new income the account generates, such as interest earned after the date of the grantor’s death, is taxable to the beneficiary. The beneficiary must provide their own Social Security Number to the financial institution, which will then issue future Form 1099s in the beneficiary’s name for any income earned. This new income must be reported on the beneficiary’s Form 1040.
A specific rule, known as the “kiddie tax,” may apply if the beneficiary is a minor or a young adult. This rule is designed to prevent parents from shifting investment income to their children to take advantage of a lower tax bracket. For 2025, the kiddie tax rules generally apply to children under 18, or full-time students under 24, who do not provide more than half of their own support.
Under the 2025 kiddie tax thresholds, the first $1,350 of a child’s unearned income is tax-free. The next $1,350 is taxed at the child’s own marginal tax rate. Any unearned income above $2,700 is taxed at the parents’ higher marginal tax rate, requiring the filing of IRS Form 8615 to calculate the tax.