If you are the beneficiary of a simple trust, you pay tax on its income each year, whether or not you receive it. Usually, though, you will receive the income, if not during the year, then after it ends. For example, income of a simple trust usually (but not always) excludes capital gains.

What does simple trust mean?

A. Simple Trust. A simple trust must distribute all its income currently. Generally, it cannot accumulate income, distribute out of corpus, or pay money for charitable purposes. If a trust distributes corpus during a year, as in the year it terminates, the trust becomes a complex trust for that year.

What happens to a simple trust when the beneficiary dies?

When a deceased beneficiary’s trust inheritance passes to her estate, it’s subject to probate. The property is eventually distributed to her beneficiaries – the ones she’s named in her will. If she doesn’t leave a will, it passes to her closest kin according to state law.

How do simple trusts work?

Simple Trust, Explained A simple trust is a type of non-grantor trust. Must distribute income earned on trust assets to beneficiaries annually. Make no principal distributions. Make no distributions to charity.

What are the rules for a simple trust?

1 The trust must retain some of its income and not distribute all of it to beneficiaries. 2 The trust must distribute some or all of the principal to the beneficiaries. 3 The trust must distribute some funds to charitable organizations.

How does the beneficiary of a trust pay taxes?

In some cases, the trustee may have the authority to make distributions of principal to beneficiaries. Taxes — The trustee reports all income generated by trust assets and pays tax on any undistributed income as well as capital gains realized by the trust.

What are the requirements for a complex 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.

Who are the beneficiaries of a trust grantor?

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.