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Is an Estate Taxed Like a Simple or Complex Trust?

The Internal Revenue Code separates trusts into two main categories: simple trusts and complex trusts. Both are actually quite common. Simple trusts are trusts which pay out all of their income each year to the beneficiaries, and complex trusts are trusts where the trustee has discretion to retain some money in the trust if needed. Simple trusts are mainly just used for probate avoidance and end quickly, while complex trusts typically last many years to avoid creditors or control property after one's passing.

Whenever one fills out a Form 1041 for his trust's income taxes, he must say what type of trust it is. Simple trusts pass all income through each year (whether or not they actually did distribute the income), while complex trusts are taxed at high rates one what they don't actually distribute before 65 days after the end of the year.

Estates have their own box on the form, but it may not be readily apparent which taxation scheme they fall under. The answer is that all estates are taxed as complex trusts. 26 CFR ยง 1.651(a)-5. Any left over income is not passed through to the beneficiaries. It is taxed at the estate and trust tax rates.