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What is a Simple Trust?

M.L. Browne
M.L. Browne

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 in which the trustee's only responsibility is to deliver the trust property to its intended recipient at a time stipulated in the trust's terms. Federal income tax laws determine the second definition, and mandate that the trustees must distribute all the simple trust's net income on an annual basis in the year in which it was earned, that no proceeds from the trust be set aside for charity, and that the simple trust principal is never to be touched. Almost anyone can set up a simple trust, and it can be made effective either before or after the creator dies.

Every simple trust has at least one trustee, or fiduciary, who is held accountable to a standard of conduct that requires performance of duties always be in the best interest of the trust's beneficiaries. The trustee's duties are imposed by the terms of the trust itself, and a key determinant for selecting a trustee is that he or she should not directly benefit from the proceeds of the trust. In a simple trust, the trustee has no duty other than to convey the trust proceeds and property to the beneficiary on demand.

Man with hands on his hips
Man with hands on his hips

Simple trusts can be set up by almost anyone, and can be made effective either before or after the creator's death. If the trust is effective before the creator dies, it is a form of living trust. When the trust is effective after the creator dies — such as one created as part of a last will and testament — it is called a testamentary trust. The principal 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 over simple trust establishment. Form 1041, available from the US Department of the Treasury Internal Revenue Service (IRS), states that the law does not permit certain arrangements that are created with the intention of reducing or avoiding taxes, or to hide or disguise asset ownership and control. The form also states that a taxpayer cannot use a trust to turn living or educational expenses into tax-deductible items. People who attempt to defraud the IRS in this way are also subject to criminal and civil penalties.

Supporting documentation and forms for tax reporting related to simple trusts are also required by the IRS. The names and numbers of the required documents are identified in Form 1041. If trust regulations exist in the state where the beneficiary lives, he or she will also need to file annual returns for state tax purposes.

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Can the will of a living disabled person be turned into a simple trust if one has a power of attorney?

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