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Simple English definitions for legal terms
Simple trust
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A quick definition of Simple trust:
Simple trust: A type of trust that has to follow three rules set by the IRS. First, all the money the trust makes has to be given to the people who will get the money (called beneficiaries) every year. Second, the trust can't give away any of the money it has saved up (called principal). Third, the trust can't give money to charities. The trust has to pay taxes on the money it makes, just like other trusts. Simple trusts are different from complex trusts because complex trusts can give money to charities and can make other payments to the people who will get the money.
A more thorough explanation:
A simple trust is a type of trust that must meet three requirements set by the IRS:
- All the income must be distributed to the beneficiaries yearly
- The trust fund must not payout any of its corpus (better known as principal)
- Cannot make charitable contributions
For example, if a parent sets up a simple trust for their child's education, the trust must distribute all the income earned from the trust to the child each year. The trust cannot use any of the principal to pay for the child's education expenses, and it cannot make any charitable contributions.
A simple trust makes tax payments like other trusts on income and capital gains. It differs from complex trusts, which may involve other payments to beneficiaries and charities.
Overall, a simple trust is a straightforward way to manage assets and distribute income to beneficiaries.