That would be correct only so long as the assets are still in the trust and have not been distributed to the beneficiaries in question. As soon as such assets are distributed to the beneficiaries, then the taxability of that transaction depends upon the tax status of the beneficiary. If he or she is a taxpayer, then yes, he or she would have to report that inheritance or windfall and pay whatever is due on it. It is, of course, possible for beneficiaries to be Natural Law Trusts, which have no tax reporting requirements; and it is also possible for the individual beneficiaries in their personal names to document themselves as exempt, using the Revocation of Election, if they are American.
