Grantor Trusts

Grantor trusts are defined by § 671 of the Internal Revenue Code. A grantor trust is a trust wherein the grantor retains certain powers over the trust, which results in the trust being disregarded as separate from the owner for tax purposes (although trust assets are still deemed to not be legally owned by the grantor or beneficiaries.) Gifts from a grantor to his grantor trust are not subject to gift taxes, and all trust income is treated as if it were earned by the grantor. On the downside, grantor trust assets are considered part of the grantor’s taxable estate when he dies. Grantor trusts do not generally apply for a tax ID number (EIN).[i] Although all revocable trusts are grantor trusts, not all irrevocable trusts are grantor trusts. For example, a trust could be irrevocable, but the grantor could reserve the right to direct the trustee to use trust funds to purchase or make payments on a life insurance policy that insures the life of the grantor or his spouse. Under § 677(a)(3) of the IRC, this would make this trust a grantor trust, even if the grantor retained no power to revoke, amend, or otherwise control the trustee or trust assets.