Simple Trusts vs. Complex Trusts: Differences

In addition to a will, a trust can be a useful tool for your estate planning. You can use a trust to remove assets from probate, potentially minimizing estate and gift taxes. It can help ensure that assets are managed on behalf of beneficiaries and in accordance with your wishes.

There are different types of trusts you can establish, with some more specialized than others. This is especially apparent when it comes to simple trusts vs. complex trusts. Knowing how these broad categories of trusts compare can help you choose the right option for your estate plan.

When it comes to estate planning, including whether to create a trust, a financial advisor can help you make the most informed decision possible.

What Is a Trust?

A trust is a type of legal entity created in accordance with your state laws to manage your assets. The person who creates a trust is called a grantor, and they have the right to transfer assets into the trust. They can also choose one or more trustees to oversee the trust.

The trustee’s job is to manage assets according to the grantor’s specifications on behalf of one or more trust beneficiaries. For example, you might set up a trust to hold assets that you want distributed among your three children when you pass away. Another option is to choose your favorite charitable organization as the beneficiary of your trust.

There are many different types of trusts, and they can be either revocable or irrevocable. Trusts can also be categorized as either grantor or non-grantor.

Revocable trust. A revocable trust can be changed during the grantor’s lifetime. If you have this type of trust and want to add assets to it or change the beneficiaries, you can do so while you’re still living.
Irrevocable trust. An irrevocable trust involves a permanent transfer of assets.
Grantor trust. In a grantor trust, the trust creator retains certain powers over the trust, including rights to the trust’s assets and income. Trust assets may be included in the trust creator’s estate when they pass away.
Non-grantor trust. With a non-grantor trust, the trust creator has no interest or control over trust assets. Trust assets are generally excluded from the trust creator’s estate at their death.

Benefits of Trusts in Estate Planning

Trusts can be used inside an estate plan to perform a number of functions with great benefits.

From protecting your assets from creditors to ensuring they pass to your beneficiaries when you die, there are plenty of uses and benefits for creating a trust.

Pass specific assets to your chosen beneficiaries
Avoid probate for certain assets
Manage estate tax and gift tax liability
Protect assets from creditors
Ensure the continued care of a special needs beneficiary
Receive the proceeds of your life insurance policy

Some of these scenarios may call for a simple trust, while others may require a more specialized trust. However, when it comes to choosing between simple trusts vs. complex trusts, do not forget to account for the corresponding tax liability.

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Simple Trust Explained

A mother holds her child, considering simple trusts vs. complex trusts for her child's future.

A simple trust is a type of non-grantor trust.

To be classified as a simple trust, it must meet certain criteria set by the IRS.

Income earned on trust assets must be distributed to beneficiaries annually.
No principal distributions are made.
There are no distributions to charity.

With this type of trust, the trust income is considered taxable to the beneficiaries, even if they don’t withdraw income from the trust.

The trust reports income to the IRS annually, and it is permitted to take a deduction for any amounts distributed to beneficiaries. However, the trust itself is required to pay capital gains tax on earnings.

A simple trust is also permitted to take a $300 exemption.

Understanding Complex Trusts

A complex trust also has certain criteria it must meet.

In order for a trust to be complex, it must do one of the following each year:

Refrain from distributing all of its income to trust beneficiaries
Distribute some or all of the trust’s principal assets to beneficiaries
Make distributions to charitable organizations

There are also other rules to keep in mind before choosing a complex trust.

First, no principal can be distributed unless all income has been distributed for the year first. Ordinary income takes first place in the distribution line ahead of dividends, and dividends must be distributed before capital gains.

Once those conditions are met, the principal can be distributed. However, all distributions must be equitable to all trust beneficiaries who receive them.

Complex Trust Taxation

Any trust that doesn’t meet the guidelines to qualify as a simple trust is considered a complex trust.

Complex trusts can take deductions when calculating taxable income for the year. This deduction is equal to the amount of any income the trust is required to distribute for the year.

A complex trust qualifies for an annual $100 exemption, as well.

Simple Trusts vs. Complex Trusts: Which Is Better?

When it comes to simple and complex trusts, one isn’t necessarily better than the other. The type of trust that ultimately works best for you depends on what you need the trust to do.

A simple trust offers the advantage of being fairly straightforward when it comes to how assets and income can be distributed and how those distributions are taxed. A complex trust, on the other hand, could offer more flexibility in terms of estate planning if you have a high net worth or multiple beneficiaries.

When comparing trust options, consider whether you want to retain control or simply hold an interest in the assets transferred into it. If you choose a simple or complex trust, you’re choosing a non-grantor trust, which means you’ll no longer have an interest in the trust assets.

Talking to an estate planning attorney or financial advisor can help you decide which type of trust may work best for your financial situation.

Tax Reporting and Administration Differences

Simple and complex trusts follow different reporting standards, which shape the cost and time required to administer.

Reporting Requirements

Both trusts must file Form 1041 each year, but the reporting burden often diverges once distributions and income categories are involved.

Trustees of simple trusts typically deal with a narrower set of tax issues because the trust must distribute all income annually. Meanwhile, complex trusts involve more administrative steps because the trustee may need to track retained income, principal distributions and any charitable transfers.

Each action can affect how much of the trust’s income is taxable to beneficiaries versus taxable to the trust itself. This requires careful accounting and may increase the need for professional tax support.

Investment Oversight

Investment oversight can also differ between the two.

A simple trust often follows a more predictable investment strategy because all income must be passed through annually. A complex trust, however, may require more active management if principal distributions are allowed or if the trustee must plan around large charitable gifts or multiple beneficiaries with differing needs.

Recordkeeping obligations tend to expand under a complex trust because the trustee must document discretionary decisions carefully. These notes show compliance with fiduciary duties and help prevent disputes among beneficiaries. Simple trusts, by contrast, have fewer decision points, making documentation requirements more limited and easier to manage.

Bottom Line

The main difference between simple trusts vs. complex trusts lies in how income and assets are distributed and how those distributions are taxed. When deciding between a simple vs. complex trust, be sure to carefully consider the size of your estate, the nature of the assets you want to include and your wishes for the management of those assets. It’s critical that you understand applicable tax requirements before creating either type of trust and how the trust will fit into your larger estate plan.

Tips for Estate Planning

Estate planning can get complicated quickly. There’s a lot to consider and it may make sense for you to speak to a financial advisor to make sure that you’ve thought through everything properly. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
While trusts can offer numerous benefits, creating one doesn’t necessarily mean you don’t also need a last will and testament. You can use a will to distribute assets that you don’t want to include in a trust. Or you could create a pour-over will to transfer assets into a trust.