Before you set up a trust, it's important to understand the different types available and the implications of choosing one.
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by Brette Sember, J.D.
Brette is a former attorney and has been a writer and editor for more than 25 years. She is the author of more than 4...
Updated on: February 2, 2023 · 2 min read
Simple and complex trusts differ in how their assets are distributed. Simple trusts are more restrictive about what can and can't be distributed whereas complex trusts are more flexible.
A trust is a legal entity created under state law for the management and distribution of assets to beneficiaries. The trust grantor creates the trust and places assets into it.
A trustee, chosen by the grantor, is responsible for managing the trust and eventually distributing its assets to the beneficiaries chosen by the grantor when the trust is set up.
A beneficiary can be anyone the grantor chooses, but is often an heir, family member, or charity.
Trusts can be used to minimize taxes, simplify or eliminate the probate process, and protect assets.
There are lots of different types of trusts (revocable, irrevocable, testamentary, asset protection, charitable, special needs, spendthrift, and so on), but when it comes to tax status, a trust is either a simple trust or a complex trust.
There are three basic characteristics that define a simple trust:
When this type of trust is used, the trust income is taxable income for the beneficiaries, even if they don't withdraw the income from the trust. Capital gains taxes are applied to the trust itself.
A complex trust is essentially the opposite of a simple trust. To be classified as a complex trust, it must do at least one of three activities within the year:
Trusts are treated as separate taxable entities, so they must file tax returns and pay income tax on their income. Trusts can deduct their expenses and are permitted a small tax exemption:
When setting up your trust, don't automatically assume you want a simple trust because it sounds easier. A complex trust actually gives you more flexibility and may be a better option, depending on your goals. It's also possible to convert a simple trust to a complex trust and vice versa, if you find your needs change.
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