Grantor trust

Key takeaway

A grantor trust is a trust whose income, deductions, and credits attributable to a portion treated as owned by the grantor or another person are included in that owner’s federal income tax computation.

A power to revoke can establish ownership

The grantor is treated as owner of a trust portion when the power to revest title to that portion in the grantor is exercisable at any time by the grantor, a nonadverse party, or both.

A nonadverse party is someone without a substantial beneficial interest that would be adversely affected by exercising or not exercising the relevant power. A general power of appointment counts as a beneficial interest.

The revocation rule has an exception when exercising the power can affect beneficial enjoyment of income only for a period beginning after an event that would prevent ownership under the reversionary interest test in section 673.

Ownership may arise after that event unless the power is relinquished.

Reporting depends on how much of the trust is treated as owned

Under the standard reporting method, a wholly grantor trust enters only entity information on its fiduciary income tax return. Dollar amounts appear only on an attachment, and the fiduciary gives the owner a copy.

For a partly grantor trust using that method, the nongrantor portion follows normal fiduciary income tax return reporting. Amounts allocated directly to the owner appear only on an attachment, with a copy given to the owner.

Schedule K‑1 is not the owner’s attachment in either case. It is used for income distributed from the portion that is not taxable directly to the grantor or other owner.

These instructions apply when the trust is not using an optional filing method. Optional methods have separate eligibility and reporting requirements.

Basis is the amount of investment in property for tax purposes. It is used to figure depreciation, amortization, depletion, casualty losses, and gain or loss on a sale or other disposition.

Trust accounting income is income determined under the governing instrument and applicable local law. Trust provisions that depart fundamentally from traditional principles of income and principal generally are not recognized.

EstatePlanner.com resources to open next

Income tax, basis and trust taxation
Open this guide to place your grantor trust questions alongside the basis and tax reporting questions you want to discuss with your advisers.
Basis and trust tax records and questions checklist
Use this checklist to organize your records before asking your preparer how the trust’s income and asset history should be documented.
Trusts
Read this guide when your next conversation concerns the trust document and funding rather than preparation of a tax return.
Trust funding records and questions checklist
Bring this checklist to a document review so you can organize funding records and ask focused questions about the powers written into your trust.

A perspective on bringing advice back to the family

One speaker described the work of finding outside expertise and making it useful within a family office.

"we could Outsource inhouse find those tools that uh that we were not exposed to that that you know I can go out there into the world chew on them and then bring them back into the families in a well polished manner"
From an Investor Advantage talk hosted by Richard C. Wilson

Common questions

Does control over a trust alone establish income tax ownership?

No. Dominion and control alone do not establish ownership under the grantor trust rules.

Does a discretionary support power alone make income taxable to the grantor?

No, if the beneficiary is someone other than the grantor’s spouse whom the grantor is legally obligated to support, and discretion rests with another person, the trustee, or the grantor acting as trustee or cotrustee.

Income actually applied or distributed for that support is taxable to the grantor. Support paid from principal or amounts other than current income is treated as a payment under section 661(a)(2) and taxed to the grantor under section 662.