Grantor Trust
What Is a Grantor Trust?
A grantor trust is a type of trust in which the person who created the trust retains certain powers or control over the trust’s assets. Because of this retained control, the grantor is generally treated as the owner of the trust assets for tax purposes.
Grantor trusts are commonly used in estate planning and tax planning strategies.
Why It Matters
Grantor trusts can offer flexibility in managing assets and may provide certain tax planning advantages. Since the grantor is responsible for paying taxes on the trust’s income, the trust assets can grow without being reduced by trust-level taxation.
This structure can help preserve assets for beneficiaries.
How a Grantor Trust Works
A trust is considered a grantor trust when the grantor retains specific powers defined by tax laws.
These powers may include:
- the ability to revoke the trust
- control over trust investments
- the ability to replace the trustee
Because of these retained powers, the trust’s income is reported on the grantor’s personal tax return.
Example
A person creates a revocable living trust and continues to control the trust assets during their lifetime. The trust’s income is reported on the grantor’s tax return.
Grantor Trust vs Non-Grantor Trust
- A grantor trust is taxed as though the grantor owns the assets.
- A non-grantor trust is treated as a separate tax entity responsible for its own taxes.
FAQs About Grantor Trusts
Are all revocable trusts grantor trusts?
Most revocable trusts are considered grantor trusts for tax purposes.
Who pays taxes on a grantor trust’s income?
The grantor typically pays the taxes.
Can grantor trusts become non-grantor trusts?
Yes. This may occur if the grantor relinquishes certain powers.
Related Terms
