Understanding Grantor Trusts

The term “grantor trust” isn’t so much a legal term as it is a tax term. According to the Internal Revenue Code, to be a “grantor” means that as the creator of the trust, the grantor retains power and control over the trust’s assets and/or income. This means is that the grantor is treated as the owner of the assets in the trust and is therefore liable for the income and estate taxes associated with the trust.

Grantors Have the Power

The grantor reserves all powers over the trust, and as such, they are taxed for any income generated by the trust. Tax rates are generally more favorable towards individuals than they are to trusts, so the grantor has certain advantages with regards to tax protection.

Grantor Trusts are Revocable Trusts

Grantors can essentially “undo” or revoke the trust. They can make changes to it, unlike irrevocable trusts. The grantor can make changes as long as they are mentally competent. What’s more, if you decide that you no longer want to pay income taxes on the trust or if you decide the trust already has enough assets, you can convert a grantor trust into a non-grantor or irrevocable trust.

Tax Advantages

Grantor trusts provide a number of tax advantages, which you should consult an attorney about. For example, you can loan money to the trust or sell assets to the trust. Moreover, the trust’s income tax is not considered a gift to the trust, so the assets can continue to grow without the burden of you having to pay the income tax. The trust doesn’t have its own tax identification number (TIN) or file returns because it is still under the grantor’s ownership.

Note: Grantor trusts become non-grantor trusts upon the death of the grantor.

Contact Us

Are you considering creating a grantor trust or are curious about what else it entails? Our established team at the Legacy Planning Law Group can help! Visit our website or contact us here if you would like to learn more. We would be happy to help you.

Written by Legacy Planning Law Group

Legacy Planning Law Group is dedicated to working with individuals and families to help protect the assets they have built throughout their life, and make everything simpler for families who have lost a loved one. We help thoughtful people achieve the peace of mind that comes with planning their personal legacy and passing on family harmony.

Written by Legacy Planning Law Group

Legacy Planning Law Group is dedicated to working with individuals and families to help protect the assets they have built throughout their life, and make everything simpler for families who have lost a loved one. We help thoughtful people achieve the peace of mind that comes with planning their personal legacy and passing on family harmony.