Simple Trust vs Complex Trust

What Is a Trust?

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.

What Is a Simple Trust?

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:

  • Income from the trust must be distributed at least annually, either to one or more current beneficiaries or to the ultimate beneficiary of the trust.
  • There are no non-skip persons (people who inherit assets if the primary beneficiary dies before all of his or her money is distributed) other than charitable organizations. In other words, the trust cannot make any distribution to charitable organizations.
  • The trust cannot distribute the principal of the trust.

What Is a Complex Trust?

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:

  • The trust should refrain from making distributions out of its income to the beneficiaries of the trust and should instead retain those incomes.
  • Distribution should be made on some or all of the principal assets in the trust to the beneficiaries of the trust.
  • The trust should make distributions of its funds to charitable organizations.

Basically, if a trust does not qualify the requirements of a simple trust, it is considered a complex trust.

Taxation of Trusts

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.

Which Is Better Between Simple Trust and Complex Trust?

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.

The Bottom Line

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.

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, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

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, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.