Simple or Complex trust

I am the fiduciary of my fathers trust. He died in 2006. In this trust is a land lease that receives $4500 a month in rental income from a gas station that sits on the land. I give my sister $2400 a month from this rent and I give myself the balance of the monthly rent minus about $30 to keep in the trust bank account for any fees or expenses I might pay that come up over the year.
I have been filing a 1041 every year as a complex trust. I have read the instructions about choosing if my trust is a complex or simple trust but am confused. I was thinking if my trust could qualify as a simple trust I could take advantage of the $300 deduction as opposed to the $100 deduction for a complex trust when I file the 1041 every year. My question is my trust a complex or a simple trust? Thank you.
Reply to
whiskers
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The Internal Revenue Code Sec. 651 has the definition. Basically, it defines a simple trust. Any trust that does not meet the definition of a simple trust is a complex trust. There are 3 requirements to be a simple trust.
1. The trust instrument states that all income must be distributed currently. 2. The trust instrument does not state that any amounts are to be paid, permanently set aside, or used for charitable purposes. 3. The trust doesn't distribute amounts allocated to the corpus of the trust.
1. and 2. are self-explanatory. Look at the trust instrument and see what it says relative to #1 and #2. # 3 may require an explanation.
Corpus is another way to say the principal of the trust or the assets the trust owns. A trust can have beneficiaries that are entitled to receive the income of the trust and it can have beneficiaries that are entitled to receive the principal when the trust terminates. These beneficiaries can be different people or entities. The trustee must ensure that he/she does not favor the income interest people over the principal interest people or vice versa. It is easy to get confused over what is income. Using your case of an asset that throws off rental income: The rental income is trust income that must be distributed currently as stated in the trust document to the income beneficiaries, who I assume are you and your sister. If you dispose of the land lease, any income you receive from the sale is principal. That money can only be distributed to the principal beneficiaries when the trust terminates. If you distribute the funds obtained upon the sale of the lease, you failed rule #3 and have a complex trust. Additionally, if you as the trustee have the authority to decide whether to distribute some, all or none of the trust income, then you have a complex trust.
So... you have to look at the trust instrument and see what it says relative to the above rules.
Also note that the above is a simple explanation of a complex subject that has some exceptions to the above rules.
Reply to
Alan
1. The trust instrument states that all income must be distributed currently. Is what I am doing giving my sister $2400 per month and giving me the balance expect for about $30 a month defined as what is stated in 1.? The wording in the trust pertaining to the income states I must give my sister $2400 per month and I can keep the rest of the income.
2. The trust instrument does not state that any amounts are to be paid, permanently set aside, or used for charitable purposes Only the first year of the trust when my father died it stated for me to give $3000 to charity. That year I filed as a simple trust. There will be no other amounts paid for charitable purposes in the future.
3. The trust doesn't distribute amounts allocated to the corpus of the trust. You are correct my sister and I are the beneficiaries. When the land is sold I will receive the funds of the sale. The sale must happen upon my sisters death which will be many years from now I am assuming that year I will have to file as a complex trust. Am I able to file as a simple trust one given year and then a complex trust on another given year?
Reply to
whiskers
Let me provide you a corollary of the rules I posted. Hopefully, it will become clearer.
For any given tax year, your trust will be a complex trust if the trustee had the discretion to accumulate or distribute income. This rule holds even if all the income was distributed. I obviously do not have the document to read. You stated that you left $30 in the trust. You stated that the document said you can keep the balance after distributing a specific sum to your sister. It sounds as though you as trustee have discretion to leave income in the trust. This makes the trust a complex trust.
For any given tax year, the trust will be a complex trust if principal is distributed.
For any given tax year, the trust will be a complex trust if a charitable contribution is made or the trust document requires that a charitable contribution be made. It sounds as though you had a complex trust for the first year at least.
For any given tax year, the trust will be a complex trust if income is required to be accumulated.
Reply to
Alan

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