Grantor Trust

A trust over which the grantor (the individual transferring property to the trust) retains certain control such that the trust is disregarded for federal (and frequently state) income tax purposes. As a result, the grantor is taxed individually on the trust’s income and pays the income taxes that otherwise would be payable by the trust or its beneficiaries. Such tax payments are not treated as gifts by the grantor to the trust or its beneficiaries. Basically, the trust assets can grow for the benefit of the beneficiaries without the burden of paying income tax. Provided the grantor does not retain certain powers or benefits, such as a life estate in the trust or the power to revoke the trust, the trust will not be included in the grantor’s estate for federal estate tax purposes. Upon the death of the grantor, the trust reverts to an irrevocable trust and is administered according to the instructions within the trust instrument.

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Reference: Grantor Trust