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What is a Simple Trust?

Estate Planners | Monday, August 29th, 2011

As far as the Internal Revenue Service is concerned, and for the purpose of taxation, there are two types of trusts, simple and complex. If a trust is classified as simple, this merely refers to how the trustee distributes income to the beneficiaries of the trust. A simple trust can be either revocable (also known as a living trust) or irrevocable, and the language of the trust instrument will affect how the trust is managed. The simple trust is named so because it deals solely on the grantor’s (the person who creates or establishes the trust) current income and how it is distributed when the grantor passes away. A simple trust does not involve any charitable gifts nor does it encompass assets that will continue to earn income after the grantor has died. A simple trust is sometimes also referred to as a bare trust.

A trustee who oversees a simple trust is tasked with the duty of distributed the current wealth that is contained within the estate of the deceased. A trust can qualify as a simple trust in those tax years in which the trust distributes its income but makes no other types of distributions. This can be true even if there are no other distributions of the current income. Since a simple trust can be either irrevocable or revocable (living), this type of trust is relatively simple, like the name suggests, and quite common.

With a simple trust, the beneficiary or beneficiaries have an absolute and immediate right to both income and capital that is left behind by the grantor. The beneficiaries of the simple trust have a right to take possession of the trust property. The property is held in the name of the trustee. Nonetheless, the trustee has no discretion over what income the beneficiary is paid.

The two most common simple trusts are living trusts and testamentary trusts. The living trust, which is also sometimes known as a revocable trust, allows the grantor to transfer property and assets into the trust throughout their lifetimes, while preserving the right of the grantor to make changes to the trust as they see fit while they are still alive. The living or revocable trust is a simple trust that does not have to go through the probate process, which makes it a simple, cheap, and fast method for heirs to receive their inheritance. The testamentary trust is a simple trust that is often established when minor children or a disabled child are the intended beneficiaries. The testamentary trust does have to go through probate court and is in fact, managed by a trustee who is supervised by the court. This type of simple trust is recommended when there are very substantial amounts of money that a minor is not legally obliged to manage.

Talk to your local estate planner to find out if a simple trust is the right type of trust for your estate.

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