I am a Trustee for a ILIT type trust for my parents. The policy premiums are now being paid annually via dividends and interest earned with the excess funds being reinvested by the life insurance company. When dividend and interest earnings are insufficient to cover policy premiums the policy grantors provide funding shortfalls and a Crummey Notice Letter is issued to the Trustees.
As part of the Trust the insurance company went from privately owned to publicly traded and some stock was issued in the process. These shares are now being held and invested in a separate brokerage investment account. Earnings are being reported to the IRS via Form 1041 trust documents.
My question has to do with the reporting to the IRS of this type trust. Is this considered a SIMPLE Trust or COMPLEX Trust for filing purposes? I am requesting a tax professional knowledgeable in trust tax matters to respond, please?
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Treas. Reg. §1.651(a)-1 should tell you about all you need to know (see the link at the bottom of this post).
In short, if the trust governing instrument requires that the trust distribute all of its income currently for the tax year and does not make a distribution other than that of current income (i.e., corpus), then the trust is considered a "simple" trust. All other trusts, typically those with set asides or that distribute corpus, are complex trusts.
See https://www.law.cornell.edu/cfr/text/26/1.651(a)-1
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