I’m going to paint a picture for you. You’re meeting with an attorney who turned over a trust document to you and you’re overwhelmed. You’re met with all these big legal words that make zero sense to you. I’m talking words like “grantor,” “non-grantor,” “irrevocable”… Seeing all these confusing terms, well, that can be a little unnerving.
Here’s some good news: just like the fact that there are three parties to a trust there are also three types of trusts.
Let’s start with the first one is a “grantor trust.” This means the grantor, or the person who put the property into the trust, is responsible for paying income taxes on that trust.
The second type of trust is a “simple trust.” This is where the beneficiary is responsible for the income taxes on that property.
Finally there’s a “complex trust,” contrary to its name, is actually quite straightforward. This trust is responsible for paying income tax. And here’s the kicker, a Complex trust can distribute assets out to the beneficiary. In this scenario, the beneficiary will be responsible for paying the taxes. The trust would only be responsible for paying the net income left in the trust. Sometimes this trust is also called a “non-grantor trust.”
So next time you go meet with your attorney, you’ll feel a little more at ease with the concepts you’ve just learned.