Any income (from investments, etc.) is taxable like all income is taxable. The trust pays the income tax on the interest (form 1041, different version of turbotax, trust needs its own separate tax ID number). Possibly the trust can pass the income through to the beneficiary, who would pay the tax.
To the best of my knowledge, the beneficiary can't list medical expenses as itemized deductions on their schedule A except to the extent they paid tax on interest. In other words, if the trust pays $10,000 of medical expenses, and the beneficiary paid no tax (because the trust filed a tax return and paid the tax), the beneficiary can't deduct any expenses on the beneficiary's tax return. If the trust paid $10,000 of expenses, of which $500 was interest and the beneficiary paid income tax on the interest, the beneficiary can list $500 of deductible medical expenses (which will likely result in no or only a very small tax benefit due to the other rules on itemized deductions.)
Someone has to pay tax every year no matter what. If the trust earns $1000 of interest and dividends in 2024, that interest is taxable to someone in 2024, even if it stays in the trust for future expenses. And if the trust has (for example) $100,000 of assets, and earns $5000 of interest, and pays $5000 of medical expenses, it doesn't matter if the trust considers the expense to have been paid from interest, principle or both, the $5000 of interest is taxable income to the trust in the year it was earned, even if it wasn't paid out.
You may want to consult with a tax professional.
