What’s a Simple Trust?

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A simple trust has two definitions in the US, one where the trustee delivers the property to the recipient and another where trustees must distribute net income annually. Trustees must act in the best interests of beneficiaries and not benefit from the trust. Simple trusts can be created before or after death and are subject to federal tax laws and regulations.

The United States (US) recognizes and defines a simple trust in two distinct ways. A simple trust, also known as a bare trust, is one where the sole responsibility of the trustee is to deliver the trust property to the intended recipient at a time stipulated in the terms of the trust. Federal income tax laws determine the second definition and mandate that trustees must distribute all net income of the simple trust annually in the year it is earned, that no proceeds of the trust be given to charity, and that the the simple principal trustee must never be touched. Almost anyone can create a simple trust and it can be implemented before or after the creator’s death.

Every simple trust has at least one trustee, or fiduciary, who is held accountable to a standard of conduct which requires that the performance of duties is always in the best interests of the trust’s beneficiaries. The duties of the trustee are imposed by the terms of the trust itself and a determining factor in the selection of a trustee is that he or she should not benefit directly from the proceeds of the trust. In a simple trust, the trustee has no other duty than to convey the proceeds and assets of the trust to the beneficiary upon request.

Simple trusts can be formed by almost anyone and can be implemented before or after the creator’s death. If the trust is effective before the creator dies, it is a living form of trust. When the trust is effective after the death of the creator, such as one created as part of a will and testament, it is called a testamentary trust. The main difference between the two forms is that a living trust is not a public document and a testamentary document is, and as such is subject to probate regulations.

US federal tax laws include restrictions and governance on simply setting up a trust. Form 1041, available from the U.S. Department of the Treasury Internal Revenue Service (IRS), states that the law does not allow certain arrangements created with the intention of reducing or evading taxes, or to conceal or disguise the ownership and control of assets. The form also states that a taxpayer cannot use a trust to turn living or education expenses into tax-deductible items. Individuals who attempt to defraud the IRS in this way are also subject to criminal and civil penalties.

The IRS also requires supporting documentation and tax filing forms for simple trusts. The names and numbers of the required documents are identified on the 1041 form. If trust regulations exist in the state where you live, you will also need to file annual returns for state tax purposes.




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