Key Takeaways
- Simple trusts must distribute all income currently and cannot distribute corpus.
- Complex trusts can accumulate income, distribute corpus, or make charitable contributions.
- Simple trusts get $300 exemption; complex trusts get $100.
- A trust can be simple one year and complex the next depending on activities.
- Grantor trusts are disregarded—income taxed to grantor, not the trust.
- First-tier distributions (required) vs. second-tier (discretionary).
Simple vs. Complex Trusts
Why This Matters for the Exam
Trust classification affects exemption amounts and how income is taxed. The exam tests the distinguishing characteristics of simple, complex, and grantor trusts.
Expect at least 2-3 questions on trust classification.
Simple Trust Requirements
A trust is simple if it meets all three requirements:
| Requirement | Description |
|---|---|
| 1. Distribute all income | Must distribute all income currently (no accumulation) |
| 2. No corpus distribution | Cannot distribute principal (corpus) |
| 3. No charitable contributions | Cannot make charitable donations from trust |
Simple Trust Exemption: $300
Complex Trust Characteristics
A trust is complex if it meets any one of these:
| Characteristic | Description |
|---|---|
| Can accumulate income | Not required to distribute all income |
| Can distribute corpus | Can distribute principal |
| Can make charitable contributions | Can donate to charity |
Complex Trust Exemption: $100
Simple vs. Complex Comparison
| Feature | Simple Trust | Complex Trust |
|---|---|---|
| Income distribution | Must distribute all | Can accumulate |
| Corpus distribution | Cannot distribute | Can distribute |
| Charitable contributions | Cannot make | Can make |
| Exemption | $300 | $100 |
| Taxation of income | To beneficiary | To trust or beneficiary |
Can Classification Change?
Yes! A trust can be:
- Simple in Year 1 (distributes all income, no corpus or charity).
- Complex in Year 2 (makes charitable contribution or distributes corpus).
The classification is determined each year based on that year's activities.
Tier System for Distributions
| Tier | Type | Description |
|---|---|---|
| First-Tier | Required distributions | Income required to be distributed currently |
| Second-Tier | Discretionary distributions | Other distributions (accumulated income, corpus) |
First-tier distributions are allocated income first; second-tier receives the remainder.
Grantor Trusts
A grantor trust is disregarded for income tax purposes if the grantor retains certain powers:
| Grantor Power | Result |
|---|---|
| Right to revoke | Grantor trust |
| Power to control beneficial enjoyment | Grantor trust |
| Certain administrative powers | Grantor trust |
| Reversionary interest >5% | Grantor trust |
Taxation: All income taxed directly to the grantor, not the trust. The trust does not file Form 1041 (or files informational return only).
Common Grantor Trusts
| Trust Type | Grantor Trust? |
|---|---|
| Revocable living trust | Yes (while grantor alive) |
| Intentionally defective grantor trust (IDGT) | Yes (by design) |
| Irrevocable trust (no retained powers) | No |
Real-World Scenario
Scenario: A trust document requires distribution of all income annually. In 2024, the trust distributes all income but also distributes $10,000 of principal for a beneficiary's medical emergency.
- Classification: Complex trust in 2024 (distributed corpus).
- Exemption: $100.
- If no principal distribution: Would have been simple trust ($300 exemption).
On the Exam
Expect 2-3 questions on trust types, typically:
- Classification Questions: "What makes a trust simple vs. complex?"
- Exemption Questions: "What is the exemption for a complex trust?"
- Grantor Trust Questions: "When is income taxed to the grantor?"
The key is to remember: Simple = all income out, no corpus out, no charity. Complex = any one exception. Grantor trust = taxed to grantor.
Which is a requirement for simple trust classification?
What exemption does a complex trust receive?
Who is taxed on income in a grantor trust?