THE PEABODY ADVOCATE – Friday, May 18, 2018
Page 15
SIMPLE TRUST VS. COMPLEX TRUST A
ll Trusts for tax purposes are classified into two basic types of Trusts: simple or complex. To determine which type of trust you are dealing with, you must read the terms of the Trust instrument itself. With a simple Trust, the Trustee is required to distribute the income generated by the Trust to the income beneficiary until some predetermined time period has passed. With a complex Trust, the
Trustee is not required to distribute the income generated by the Trust to the income beneficiary. The Trustee has discretion to distribute income. A simple Trust cannot make distributions to charitable organizations. A complex trust can make distributions to charitable organizations. Capital gains are generally considered to be a part of the principal (or corpus) of the Trust
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and therefore are not distributed to the income beneficiary of a simple Trust. With a simple Trust, the income beneficiary will be taxed on trust ordinary income such as interest income and dividend income, whether or not it is actually distributed to the income beneficiary. With a complex Trust, the Trustee has discretion to distribute income to specific beneficiaries pursuant to the terms of the Trust itself. If the income of a complex Trust is not distributed, the Trust itself will pay the tax. If the income
is distributed, then the beneficiary receiving the income will report the income on his or her tax return upon the receipt of a Schedule K-1 form from the Trustee. The beneficiary will pay the tax on his or her individual income tax return. Income tax rates for complex trusts are significantly higher than for individuals. From a tax standpoint, it often makes sense to distribute income out to the beneficiaries in order to save substantial tax dollars. A Trust will lose its classification as a simple Trust during any year in which the Trustee distributes cor-
pus. A simple Trust is entitled to a very low exemption of $300 to offset income generated by the Trust. A Complex Trust is entitled to an even a lower exemption of $100. A Trust can never be a simple Trust in the year of termination. You must check off one of the boxes on page one of Form 1041 before filing a Trust income tax return in order to let the IRS know what type of Trust is involved.
TAX TALK | FROM PAGE 13
tute of Certified Public Accountants (AICPA) and the Massachusetts Society of Certified Public Accountants (MSCPA). Jit Lee Billings, CPA is a managing member of Terranova & Asso-
ciates, LLC and a member of AICPA and MSCPA. Terranova & Associates, LLC is located in Danvers and can be contacted at 978-774-7700 for consultations.
Thomas D. Terranova, Jr., CPA, PFS, CITP is a managing member of Terranova & Associates, LLC and a member of the American Insti-
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