Simple or Complex Trust

[JO4]

My question is whether, under the circumstances described below, the trust whose tax return I’m preparing (for 2016) is simple or complex. The trust was established by my mother. My sister and I are co-successor trustees and the only beneficiaries. The trust document provides that upon my mother’s death, the trustee shall pay any taxes or other expenses. It goes on to say that the remaining assets be distributed into equal shares between my sister and me. The trust document does not specify that that all of the assets be distributed immediately. The trust has no further sources of income.

The trust’s assets included stock, a home, and two IRAs. After my mother’s passing, my sister and I divided the stock equally between us. We sold the home and split the proceeds between us equally. We cashed in the IRAs and kept some money in an account to cover expenses, but have split the remainder. My question is whether the trust is simple or complex. Also, can you tell me whether this designation makes any significant difference in the trust’s ultimate tax liability?

[tagteam · Accepted solution]

"...w hether this designation makes any significant difference in the trust’s ultimate tax liability?"

When you make distributions in the same tax year as the trust receives income (i.e., there is distributable net income), then that income is passed through to the beneficiaries on the K-1s. The income is then reported on the income tax returns of the beneficiaries and the trust, typically, has no tax liability (unless capital gain is retained within the trust).

In your specific case, it appears as if, (a) you have distributed all trust property to the beneficiaries, (b) the distribution(s) included trust corpus (principal) plus income/gain, (c) you are filing the final return for the trust, and (d) regardless of the foregoing, there was never any requirement in the trust instrument that all income be distributed currently.

Therefore, you would indicate that the trust is a complex trust.

See https://www.irs.gov/instructions/i1041#idm140376226642960