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Basic Types of Trusts

There are several specialized trusts, however they all will generally fit into one of the following categories:

Simple Trust

A simple trust is one of three general types of trust and must meet three requirements set by the IRS:

  • All the trust’s income must be distributed to the beneficiaries yearly,
  • The trust must not pay out any of its corpus (better known as principal), and
  • Cannot make charitable contributions.

In a simple trust, all income is treated as distributed tothe beneficiaries. In such a case, the trust reports all income annually, but is entitled to a deduction for the entire amount distributed to beneficiaries.

Since a simple trust cannot pay out any of its corpus, the result is that the trust cannot distribute capital gains which are therefore taxable to the trust.

Complex Trust

Is a trust that is not a simple trust. A trust is complex if at least one of the following occurs:

  • There is no requirement to distribute all the trust income to the beneficiaries. 
  • The beneficiaries received principal distributions during the tax year.
  • Distributions were made to charitable organizations.

Grantor Trust

A grantor trust is a legal trust under applicable state law that is NOT recognized as a separate taxable entity for income tax purposes because the trustor has not relinquished complete dominion or control over the trust, and trust income is reported on the trustor’s 1040.

  • The trust ID number is the trustor’s SSN.
  • All revocable trusts are grantor trusts, but not all grantor trusts are revocable.
  • A grantor trust generally does not file a 1041. However, when the trustor and trustee are the same, the IRS requires the grantor trust to have an EIN. So the IRS can trace the income, and not trigger inquiries, the 1041 provides the ability to file for a grantor type trust using the EIN that was acquired for the trust. When filing a 1041 for a grantor type trust:
    • Only complete the information block on the 1041
    • Attach a statement:
      • Detailing the grantor trust income and deductions.
      • Provide the name, contact information and TIN for the individual reporting the income on their 1040. 

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