Simple Trusts and Complex Trusts: The Differences

Simple trusts and complex trusts may sound like opposites, but the distinction isn’t about how difficult they are to create or manage. It’s actually about how they’re taxed, how income is distributed, and what the trust is allowed to do.

In short: simple they are treated differently under the IRS code—and that impacts how they operate in the real world.

Real-world example: The annual income trust

Imagine a parent sets up a trust for their adult child using investments that generate $10,000 in income each year. Under a simple trust arrangement, that $10,000 must be paid out to the child each year. The trustee doesn’t have discretion—they’re legally required to pass along that income. The trust itself doesn’t pay taxes on the income; the beneficiary does.

This setup is often used when the grantor (the person who created the trust) wants to guarantee an annual payout and avoid the trust being taxed on earnings.

What Is a Complex Trust?

A complex trust can do things a simple trust can’t. It can:

• Retain income
• Distribute principal
• Make charitable contributions

Because of this flexibility, they are often used for long-term wealth management or when beneficiaries have specific needs that don’t align with regular income distributions.

Real-world example: The discretionary family trust

Let’s say a grandparent creates a trust for several grandchildren, with instructions allowing the trustee to distribute income or principal as needed. One grandchild is in college and needs help with tuition. Another is buying a home. A third is doing fine financially and doesn’t need anything this year.

A complex trust enables the trustee to help the first two while letting income accumulate for the third. This kind of flexibility can be ideal when life circumstances vary or evolve over time.

Taxation: A Key Difference Between the Two

The IRS treats simple and complex trusts very differently when it comes to taxes.

Taxation of simple trusts

All income is distributed to beneficiaries. The trust itself generally doesn’t pay income tax because the beneficiaries do. Each receives a Schedule K-1 showing the income they must report on their own tax return.

Taxation of complex trusts

These can retain income—and if they do, they pay taxes on it. Trust tax brackets are much steeper than individual ones, so this can have a big impact. However, if income is distributed, the beneficiaries are responsible for reporting it.

Distribution Rules and Flexibility

One of the easiest ways to remember the difference is this: simple trusts must distribute income, while complex trusts may or may not.

Required vs. optional distributions

Simple trusts have no wiggle room. They’re required to pay out all income annually, regardless of whether the beneficiary needs it. Complex trusts offer more control, allowing income to be retained or distributed at the trustee’s discretion.

This flexibility means they can adapt to changing life circumstances. They can delay distributions for younger beneficiaries, prioritize support based on financial need, or hold back funds to protect assets.

Charitable Contributions

Here’s another point of distinction: only complex trusts can make charitable donations directly.

This matters when charitable giving is part of the estate plan. Whether it’s an annual donation to a university or a bequest to a local nonprofit, complex trusts give trustees the authority to carry out these instructions.

Real-world example: The charitable legacy trust

A trust established by a philanthropist might support a local scholarship program each year. Because it’s a complex trust, the trustee can make those donations as outlined. A simple trust wouldn’t have that ability, regardless of the grantor’s wishes.

Which Type of Trust Is Better?

There’s no one-size-fits-all answer. Whether simple or complex makes more sense depends on the goals of the person setting it up.

People often choose a simple trust when:

• They want to provide steady income to beneficiaries.
• They don’t need charitable giving.
• They want a trust that’s easy to manage and tax-efficient.

People often choose a complex trust when:

• They want to control when and how funds are distributed.
• They plan to include charitable giving.
• They need flexibility to adapt to beneficiaries’ changing needs.

When Trusts Change

It’s worth noting that a trust doesn’t have to stay “simple” or “complex” forever. For tax purposes, a trust’s classification can change from year to year depending on what it does.

For example, if a simple trust retains income or makes a charitable donation in a given year, it becomes a complex trust for that tax year.

Summing Up Simple Trusts and Complex Trusts

Simple trusts and complex trusts serve different roles in estate planning. Simple trusts are predictable and efficient—ideal when your goal is to pass along income. Complex trusts are powerful and flexible, built for adapting to life’s unexpected turns and providing long-term support.