What Is a Grantor Trust? Understanding This Key Estate Planning Tool

When creating an estate plan, one of the most powerful and flexible tools available is the grantor trust. Whether you're looking to minimize taxes, control asset distribution, or protect family wealth, understanding how a grantor trust works is essential.

In this post, we’ll break down what a grantor trust is, how it operates, and why it might be a strategic part of your estate plan.

What Is a Grantor Trust?

A grantor trust is a type of trust where the grantor—the person who creates and funds the trust—retains certain powers or benefits over the trust assets. As a result, for income tax purposes, the IRS treats the trust’s income as if it belongs to the grantor, even though the trust may be a separate legal entity.

This means that all income, deductions, and credits generated by the trust are reported on the grantor's individual tax return, not on a separate trust tax return.

Key Features of a Grantor Trust

Here are the primary characteristics that define a grantor trust:

• Grantor Control: The grantor retains control or certain powers, such as the right to revoke the trust, substitute trust assets, or direct income to themselves.

• Income Tax Responsibility: The grantor pays income taxes on the trust’s income, which can reduce the value of the estate and benefit heirs.

• Can Be Revocable or Irrevocable: Not all grantor trusts are revocable. An irrevocable trust can still be classified as a grantor trust if the grantor retains certain rights.

• Not a Separate Taxpayer: From a federal tax perspective, the trust is disregarded as a separate taxable entity.

  
  

Examples of Common Grantor Trusts

1. Revocable Living Trusts – These are almost always considered grantor trusts because the grantor retains full control, including the ability to amend or revoke the trust.

2. Intentionally Defective Grantor Trusts (IDGTs) – These are used for advanced estate planning. While “defective” for income tax purposes (the grantor pays the tax), they are effective for removing assets from the grantor’s estate.

   
   

Benefits of a Grantor Trust

• ✅ Tax Efficiency: The grantor pays the tax on trust income, allowing the trust assets to grow undiminished for beneficiaries.

• ✅ Estate Reduction: Paying trust income taxes personally reduces the size of the taxable estate.

• ✅ Flexibility: Especially with revocable grantor trusts, the grantor can make changes as needed during their lifetime.

• ✅ Avoids Probate: Assets in a revocable grantor trust can pass to beneficiaries without the need for probate court proceedings.

Grantor Trust vs. Non-Grantor Trust

Feature	Grantor Trust	Non-Grantor Trust
Taxed to	Grantor’s personal tax return	Trust files its own tax return
Control Retained by Grantor	Yes	No
Estate Planning Use	Income tax planning & control	Asset protection & estate freezing
Revocability	Often revocable	Typically irrevocable

When Does Grantor Trust Status End?

Grantor trust status ends at the grantor’s death or when the grantor relinquishes the powers that caused the trust to be treated as a grantor trust. At that point, the trust becomes a non-grantor trust and must file its own tax returns.

Is a Grantor Trust Right for You?

A grantor trust is an excellent tool for:

• Individuals seeking to avoid probate

• Parents who want to retain control while planning for their children’s inheritance

• High-net-worth individuals engaging in estate tax planning

However, it's not ideal for everyone. Because the grantor is responsible for income taxes, this type of trust requires financial stability and tax awareness.

Final Thoughts

A grantor trust can provide both flexibility and strategic tax advantages in estate planning. Whether you’re setting up a simple revocable trust or an advanced IDGT, it’s crucial to understand how your retained powers affect taxation and control.

Consulting an experienced estate planning attorney is key to selecting and structuring the right type of trust to meet your goals.

Contact the top-rated California trust and probate attorneys Moravec, Varga & Mooney today to schedule a telephonic consultation. Have questions? call (626) 460-1763 or email LV@MoravecsLaw.com.

Southern California Probate Lawyer Serving all counties in California, including Los Angeles, Riverside, San Bernardino, Sacramento, Santa Cruz & Beyond.