Grantor and non-grantor trusts

Rule

Grantor and non-grantor trusts are taxed differently.

Non-grantor trusts are treated as separate entities (like a C-Corporation). But grantors of grantor trusts maintain significant rights to the trust’s assets and income. Because of that, they’re treated as if they are direct owners of the trust assets (like a sole proprietorship).

Tell me more

A grantor trust is any trust in which the grantor is treated as owner of any portion of the trust. This is determined by a list of powers. Some of the most common powers are:

Power to revoke
Power to substitute assets or borrow from trust without adequate security
Power to distribute income from trust to Grantor or Grantor’s spouse
Power to add beneficiaries

There are many other powers that can cause a trust to be a grantor trust; a grantor only needs one of these powers for the trust to be a grantor trust.

How they’re taxed

The IRS allows grantor trusts to use the grantor’s Social Security Number (SSN) instead of having a separate Tax Identification Number (TIN).
Many grantors request a TIN anyway for privacy or other reasons.
In either case, the income a grantor trust receives is taxable to the grantor and there is no separate tax return for the grantor trust.
A married couple filing jointly, who both have grantor trust powers, may elect to use either spouse’s SSN for the trust.
If a grantor trust uses a grantor’s SSN, the trust will need to apply for its own TIN upon the death of the grantor(s).

A non-grantor trust is any trust that is not a grantor trust.

How they’re taxed

As a separate tax entity, a non-grantor trust is required to have its own TIN.
Non-grantor trusts must pay taxes on income received, which is typically at much higher rates than for individuals.

The subject matter in this communication is provided with the understanding that Principal^® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other financial professionals on all matters pertaining to legal, tax, or accounting obligations and requirements.

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