Simple Trust vs. Complex Trust

Before you set up a trust, it's important to understand the different types available and the implications of choosing one.

Start your living trust

Start Now
Trustpilot star rating bar
A woman checking on laptop regarding the differences between simple trust vs complex trust
Start Now
Brette Sember, J.D.
by

Brette Sember, J.D.

Contents

Updated on: April 26, 2024
Read time: 3 min

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 man is creating his documents to set up a trust to distribute his assets and detailing every responsibilities that he wish to carry out after he dies through the trust.

Understanding trusts

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.

A trust isn’t just for the wealthy

It's more than just your assets; it’s also about your voice when you can’t speak for yourself.

Understand the benefits

Definition of a simple trust

There are three basic characteristics that define a simple trust:

  • The trust must annually distribute to the beneficiaries any income it earns on trust assets.
  • The trust cannot distribute the principal of the trust.
  • The trust cannot make distributions to charitable organizations.

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.

Definition of a complex trust

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:

  • The trust must retain some of its income and not distribute all of it to beneficiaries.
  • The trust must distribute some or all of the principal to the beneficiaries.
  • The trust must distribute some funds to charitable organizations.

A guided trust that fits your needs

Our tool helps you build a living trust online—editable anytime and get attorney guidance if you need it. 

Try it now

Taxation of trusts

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:

  • A simple trust can take a $300 exemption.
  • A complex trust can take a $100 exemption.

Choosing a trust taxation type

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.

Start your living trustStart Now
Twitter logoFacebook logoLinkedIn logoReddit logo

This article is for informational purposes. This content is not legal advice, it is the expression of the author and has not been evaluated by LegalZoom for accuracy or changes in the law.