The classification of trusts, whether it is simple or complex, is dependent on how to trust document specifies it to be. Complex trusts quite plainly, are trusts that are not simple in that it can make distributions to charitable institutions and it does not have to distribute all of the income that it has earned for the tax year. As opposed to a complex trust, a simple trust has to pay its beneficiaries all of the income it has earned for the year, states the EstatePlanners.com.
Trusts are legal agreements that transfer ownership and control of assets from a grantor (the creator of the trust and the one who funds it with assets) to a trustee for the benefit of a beneficiary. Trusts have several advantages and these include protection from creditors, probate, reallocation in case of divorce and some tax obligations notes Carr Riggs & Ingram.
The designation of a trust, whether it is simple or complex, is primarily for the purposes of paying federal income taxes. A simple trust enjoys a higher tax deduction than complex trust. However, improper management of a simple trust can make it switch between the classification causing complications and incur a higher tax penalty.
Complex trust can enjoy tax deferrals for the distribution it makes to its beneficiaries. This type of trust can also deduct an unlimited amount of income that it allocates to charitable institutions and non-profit organizations. However, the beneficiary that receives a distribution from a complex trust should report it as a regular income and file it in the tax year that he received it.