What is a Grantor Trust?

A Trust is a Grantor Trust if one or more of the Grantor Trust powers are retained by the Grantor.  The effect of being a Grantor Trust is that the trust will be disregarded for tax purposes.  Depending on the retained power (or combination of retained powers) the trust could be Grantor Trust for Income Tax purposes, but not a Grantor Trust for Estate Tax purposes. 

Some other advisors often mention to me that an irrevocable trust cannot be a grantor trust.  Or rather that only revocable trusts are Grantor Trusts.  This is incorrect.  A Trust is a Grantor Trust IF the Grantor retains certain powers over the trust. The Power to Revoke is one of powers that triggers Grantor Trust status. The Power to Revoke is not the only power that creates Grantor Trust status. A Grantor could create an Irrevocable Trust, and retain some other grantor trust power, and make the Irrevocable Trust be a Grantor Trust. Typically, we use one or more of the following three powers that make an Irrevocable Trust be a Grantor Trust for income tax purposes:

1. Power to substitute assets of equal value,
2. Power to add charitable beneficiaries, and/or
3. Power to borrow trust assets with inadequate security.

Retaining one (or more) of these powers will make a trust a Grantor Trust, even if the trust is irrevocable.

Estate Planners typically use the term Grantor Trust only in regard to whether the trust is a Grantor Trust for Income Tax purposes.  For Estate Tax, we typically refer to a trust as either a "complete" or an "incomplete" gift trust.

By: Attorney Patrick D. Newton