Grantor Trusts can be a source of confusion for elder law attorneys and their clients alike. That’s because they are not a typical type The biggest difference to note is that it is about how the trust’s income is taxed rather than who receives the income or assets.
In short, a Grantor Trust is a trust in which the originator of the trust, retains control over it. Therefore, the income is included in the income of the deemed owner rather than the trust or any other person. This distinction places them into the “revocable” category. The goal of establishing one is to tax someone other than the recipient on the income that is generated by the trust.
Because Trust status is an income tax concept (rather than a gift tax or estate tax concept), it includes both ordinary income and capital gains. The status could apply to one type of income but not the other — it’s not an all-or-nothing proposition. A person can also have power over a fractional share of the trust, causing grantor status only as to that share.
A originator usually acts as trustee of his own revocable living trust, retaining control over its income and assets. The grantor can appoint and change trust beneficiaries, and determine who who receives income from the trust. As the person making all of these decisions, he or she assumes the tax liability for the trust.
Because it is an income tax term, it’s not a term that elder law attorneys should be using with their clients. Instead, it’s helpful to understand the types of trust that fall under the Grantor Trusts umbrella.
These include Retained Interest Trusts, such as Revocable Trusts (or Living Trust), Grantor Retained Annuity Trusts (GRAT), and Qualified Personal Residence Trusts (QPRT). They can also include Intentionally Defective Grantor Trusts (IDGT). An IDGT is a completed transfer to a trust for transfer tax purposes but an incomplete, “defective” transfer for income tax purposes.
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