Trust beneficiaries typically do pay taxes on distributions from a trust’s income, but they are not subject to taxes on returned principal from the trust’s assets. When money is distributed from a trust, the trust issues a K-1 form, which breaks down the distribution, or how much of the distributed money came from principal versus interest. The K-1 is the form that lets the beneficiary know the tax liability from the trust's distributions. At the same time, the trust issues Form 141, in which the trust deducts from its own taxable income any interest it distributes to beneficiaries.