A trust is a legal arrangement in which the creator or "trustor" gives assets to an individual or institution—the "trustee"—to hold and manage for the benefit of another individual or group of individuals—the "beneficiary." The trustee can be held responsible for managing these assets with prudence and skill. The beneficiary has the right to receive the benefits from the trust but typically can't direct how or when the trustee makes distributions. Have questions about Simple Trusts and Complex Trusts? Click here. A simple trust is a type of trust that has fewer tax and administrative requirements than a complex trust. To be classified as a simple trust, the trust must meet all of the following requirements: A complex trust is a type of trust that has more tax and administrative requirements than a simple trust. To be classified as a complex trust, the trust must meet all of the following requirements: Basically, if a trust does not qualify the requirements of a simple trust, it is considered a complex trust. The taxation of trusts depends upon its classification as either a simple trust or a complex trust. For a simple trust, income is taxed to the beneficiary who receives it. The trustee is not taxed on any income earned from the trust. For a complex trust, all of the income of the trust is taxed to the trustee, whether or not it is distributed to beneficiaries. The trustee can then pass along the tax burden to the beneficiary by making distributions in amounts that reflect the taxes paid on that income. Deductions from taxable income for the year may be considered for complex trusts. This is computed by looking at the amount of income the trust is required to distribute for the year. Trusts are permitted a small tax exemption. In the case of simple trusts, this exemption is $300 while complex trusts can take a $100 exemption. The answer to this question really depends on your specific situation. A complex trust may be more advantageous if you have a lot of income that you want to distribute to beneficiaries in different ways or if you want to make distributions to charitable organizations. However, setting up and maintaining a complex trust can be more complicated and expensive than setting up and maintaining a simple trust. It is important to consult with an attorney or tax advisor to determine which type of trust is right for you. A complex trust offers more flexibility than a simple trust but with greater administrative and tax requirements. If you are considering setting up a trust, it's best to consult with an estate planning attorney to determine which type of trust is most appropriate for your specific needs. What Is a Trust?
What Is a Simple Trust?
What Is a Complex Trust?
Taxation of Trusts
Which Is Better Between Simple Trust and Complex Trust?
The Bottom Line
Simple Trust vs Complex Trust FAQs
A simple trust is easier to set up and maintain than a complex trust, but it has more limited tax and administrative requirements. A complex trust offers more flexibility than a simple trust, but with greater administrative and tax requirements.
Income from a simple trust is taxed to the beneficiary who receives it even if they don't withdraw income from the trust.
The beneficiary who receives income from a simple trust must file their income tax return with that information, not the trustee or anyone else on behalf of the trust.
It's possible to revoke a trust, but it's usually not done easily. Depending on how carefully your initial grant of the property has been handled, you may need to file court proceedings in order to get back control over that property. It is best to consult with an attorney for specific questions about revoking trusts.
No, not everyone needs to set up a trust. Trusts are generally used to help people avoid probate and to manage the property when they can't do so themselves. If you don't have any property that needs to be managed after you die or if you're not worried about probate, then you likely don't need a trust.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
