What is a Grantor Trust?
A Grantor Trust is an "umbrella term" for any trust where the creator (the Grantor) is considered the owner of the assets for income tax purposes. In this setup, the trust does not pay its own taxes. Instead, the Grantor reports the trust’s income—such as rent from real estate or interest from bonds—on their personal tax return.
Most Grantor trusts use the Grantor’s Social Security number for reporting. This status is triggered by certain powers the Grantor retains, such as:
Serving as the Trustee.
Adding or removing beneficiaries.
Maintaining the right to cancel (revoke) the trust and reclaim the property.
Revocable vs. Irrevocable Status
All trusts are either Revocable or Irrevocable, and this affects their tax status:
Revocable Living Trusts (RLT): Because you can change or cancel these at any time, they are always Grantor trusts while you are alive.
Irrevocable Trusts: These are usually more rigid to help reduce estate tax exposure. While most are Non-Grantor trusts, some specific types—like Intentionally Defective Grantor Trusts (IDGTs) or Irrevocable Life Insurance Trusts (ILITs)—are designed to maintain Grantor status for specific tax advantages.
What is a Non-Grantor Trust?
A Non-Grantor Trust is a separate legal entity that pays its own income taxes. These trusts use the tax brackets for estates and trusts rather than individual brackets.
A common example is a Sub-Trust (or Testamentary Trust) created by a Will after someone passes away. Note that trust tax brackets are "compressed," meaning a trust reaches the maximum tax rate (37%) at a much lower income level than an individual does.
What Happens After Death?
At the moment the Grantor dies, a Grantor trust typically becomes a Non-Grantor trust. Because the "owner" must be alive to maintain Grantor status, the trust must now:
Apply for a new Tax ID: The successor trustee must apply to the IRS for a unique Employer Identification Number (EIN).
File its own returns: The trust becomes responsible for filing and paying taxes on any income generated by its assets moving forward.