Grantor Trust

What is a grantor trust?

A grantor trust is an estate planning tool that allows the owner—referred to here as the "grantor"—to retain control of all trust assets during their lifetime. In the eyes of the Internal Revenue Service (IRS), a grantor trust is considered a disregarded entity, which means that any taxable income earned by the trust assets is reported on the grantor’s personal income tax return.

Grantor trusts are living trusts, which allow grantors to make decisions about what happens to their estate after they die without giving up control while they’re still living. Grantor trusts also act as a form of tax shelter for the grantor’s beneficiaries. Because the grantor remains responsible for paying tax on any trust income, the trust assets aren’t subject to gift tax.

FAQs

Can grantor trusts be revoked or changed?

Revocable grantor trusts can be changed or amended at any time since the grantor retains control over his or her assets, even after they’ve been placed into the trust.

Some grantor trusts are irrevocable, however. True to their name, irrevocable trusts aren’t intended to be revoked or changed, though there may be certain circumstances where a change may be allowed. Amending or revoking an irrevocable trust can be difficult, so it’s recommended that you seek the help of an estate planning attorney.

How are grantor trusts taxed?

Grantor trust assets are taxed at the grantor’s personal income tax rate. Because a grantor trust isn’t considered a separate entity for income tax purposes, the grantor is responsible for paying tax on any trust income—including dividends—on their personal income tax return.

What is an intentionally defective grantor trust?

An intentionally defective grantor trust is a more complicated form of grantor trust in which the grantor gifts or sells some of their assets to the trust in order to avoid paying estate tax. Intentionally defective grantor trusts walk the line between a revocable trust and irrevocable trust and can be extremely difficult to manage without the help of an experienced attorney.

Do you need an estate planning attorney to help you with a grantor trust?

While you don't technically need an estate planning attorney to help you create and manage a grantor trust, it may be advisable to do so. They can help you determine whether it could be in your best interest to set up your grantor trust as a revocable or irrevocable trust, and help you understand how your decision will affect your income tax and estate tax responsibilities, as well as any gift tax your beneficiaries may need to pay later.