In regards to finance, a trust is an account that is created to hold money or property for someone. It is created primarily for tax purposes because trusts are treated according to specific rules separate from any monies earned or properties owned, and they are often tax exempt with certain restrictions. A complex trust does not require that the funds in it be paid out right away, and it can keep gaining income without having to distribute the money or property. This is the exact opposite of a simple trust, which requires any income it receives be distributed immediately.
The basic principle behind a trust is that it serves a place to hold property and money for safekeeping. There are four basic elements that make up a trust. The grantor of a trust is the person who created it. A trustee is the person or establishment which is holding the trust, and the beneficiary is the person receiving the property or money from the trust. The principal, also sometimes referred to as the corpus, is the original money that is deposited into the trust, and it will vary over time as it earns dividends or gets paid out.
All trusts are either categorized as simple trusts or complex trusts so they can be taxed accordingly. Essentially, anything that does not meet the criteria for a simple trust is considered a complex trust. A simple trust requires that no funds are paid out from the original principal, all income it gains has to be distributed within the tax period it is earned, and no funds are to be given to, set aside for, or used for charities.
A complex trust, then, would be a trust that does not require the income be paid out immediately. The funds from a complex trust can also be used to donate to a charity or for charitable purposes. Money can also be taken from the original principal and paid out. A simple trust can become a complex trust if it violates the terms of being a simple trust, and would be taxed accordingly.
The advantages of having a complex trust over a simple trust are leveraged by the way it is taxed. A simple tax usually receives a higher amount of deduction from taxes at the end of the year, making the overall taxes owed less. One advantage of the classification system is that it can be changed every tax year. If one has a complex trust it can be later deemed a simple trust if certain rules are followed.
