7. Will beneficiaries receive what is intended from a ‘simple’ trust?

Simple trusts require that beneficiaries receive distributions of all the trust’s income at least annually; the definition of income can depend on the trust agreement or state law.

Consider how the income generated by a simple trust will be treated for trust distribution purposes. For example, if the trust holds an interest in a flowthrough entity, the income from the entity is generally ignored, and only actual distributions made from the entity are “income” for fiduciary accounting distribution purposes. If the trust holds flowthrough entities that rarely make distributions, the beneficiary may not receive as much benefit as the grantor had originally intended. This structure, however, may be perceived as a benefit in other planning scenarios in which the flow-through entity’s distributions control the trust’s ability to make distributions.

Understanding how these types of trusts operate for distribution and income tax purposes can help facilitate an effective estate plan to ensure beneficiaries receive a benefit consistent with the grantor’s intentions.

Planning point: If the simple trust has taxable income and the beneficiaries receive distributions, the beneficiaries will have personal income tax consequences related to the distributions they receive. Make sure the beneficiaries understand the impact of the distributions to avoid surprises.