Legal Definitions - complex trust

A complex trust is a type of trust that offers greater flexibility and discretion to its trustee compared to a simple trust. The term "complex" primarily refers to the trustee's ability to make decisions about how and when trust income and principal are distributed, rather than implying the trust document itself is unusually complicated.

To be classified as a complex trust for tax purposes, a trust must engage in at least one of the following activities during a given tax year:

• It retains some of its income rather than distributing all of it to beneficiaries.
• It distributes a portion or all of the trust's original assets (known as principal or corpus) to its beneficiaries.
• It makes distributions of its assets to qualified charitable organizations.

This structure allows for more sophisticated estate planning, especially for individuals with substantial assets or numerous beneficiaries, as it provides the trustee with the power to adapt distributions to changing circumstances or specific beneficiary needs over time. Complex trusts can also deduct certain expenses and income amounts that they are obligated to distribute when calculating their taxable income.

Examples of a Complex Trust:

• The Educational and Entrepreneurial Trust: A grandparent establishes a trust for their grandchild, specifying that the trustee should hold and invest the trust's income until the grandchild enrolls in college. Once in college, the trustee is authorized to distribute funds for tuition and living expenses from both the accumulated income and, if necessary, the trust's principal. After graduation, the trustee has the discretion to distribute a significant portion of the remaining principal to help the grandchild start a business venture.

  How this illustrates a complex trust: This trust is complex because the trustee retains income for a period (until college enrollment) and later distributes portions of the trust's principal for both educational costs and a business startup. These actions directly align with the criteria for a complex trust.

• The Philanthropic Family Trust: A wealthy individual creates a trust that provides for their adult children but also mandates that 10% of the trust's annual income be distributed to various environmental charities each year. The trustee has the discretion to choose which specific environmental organizations receive the funds annually.

  How this illustrates a complex trust: This trust qualifies as complex because it makes regular distributions of its assets (income) to qualified charitable organizations, which is one of the defining characteristics of a complex trust.

• The Discretionary Family Support Trust: A parent sets up a trust for their three adult children, granting the trustee full discretion to distribute income and principal based on each child's individual financial needs, rather than fixed, equal amounts. In one year, the trustee might distribute a larger sum of principal to one child for a down payment on a house, while retaining most of the income for the other two children's future needs, as they are currently financially stable.

  How this illustrates a complex trust: This trust is complex because the trustee has the discretion to retain income (not distributing all of it) and to distribute principal to beneficiaries based on their needs, rather than a mandatory, full distribution of income. This flexibility in managing and distributing both income and principal makes it a complex trust.