Legal Definitions - complex trust

A complex trust is a type of trust that does not meet the requirements of a simple trust according to the IRS. The term "complex" refers to the trustee's discretion rather than the complexity of the trust's provisions. To be considered a complex trust, it must engage in at least one of the following activities each year:

• Keep part of its income instead of giving it all to the beneficiaries
• Distribute part or all of the trust's principal to the beneficiaries
• Distribute a portion of the trust's assets to charitable organizations

For tax purposes, complex trusts can deduct certain expenses when calculating taxable income for the year. The amount of income the trust is required to distribute for the year is deducted. A complex trust may provide additional estate planning options for owners with large estates or many beneficiaries.

Let's say that a wealthy individual sets up a trust for their children and grandchildren. The trust is set up as a complex trust because it distributes a portion of its assets to charitable organizations each year. The trustee has discretion over how much income to distribute to the beneficiaries and how much to keep in the trust. The trust can deduct certain expenses when calculating taxable income for the year, such as the amount of income it is required to distribute to the beneficiaries. This allows the trust to minimize its tax liability and provide additional estate planning options for the owner.