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What are Grantor Trust Rules?

There are certain guidelines in the Internal Revenue Code that define some tax implications of a grantor trust. These guidelines are called the Grantor Trust Rules. Based on these rules, an individual is held accountable for income for estate tax purposes if he/she is the creator of the grantor trust. This individual is also identified as the owner of the assets and the property held by the trust.

How do Grantor Trust Rules Work?

As per the rules, the assets and the investments within a trust are controlled by the grantor. For any income that is generated, tax is calculated based on the tax rate for the individual who is the beneficiary rather than the trust itself. This is favorable to the individual, as it offers tax protection to a certain level. Tax rates for individuals are more sympathetic as compared to the trusts. Many trusts are revocable. Grantors of a revocable trust can modify the beneficiaries of a trust or they can assign a trustee to make any changes. This includes the change in investments and assets. As long as the grantor is mentally competent while making the decision, they can undo a trust. This is the identifying feature which makes it a type of revocable living trust. The trust is considered an irrevocable trust if the grantor fully relinquishes the control of the trust. If this happens, then the trust pays taxes on any generated income. A tax identification number (TIN) will also be needed in such a case.

How Grantor Trust Rules Apply to Different Trusts

According to the grantor trust rules, under some conditions, an irrevocable trust can be treated by the IRS (Internal Revenue Service) in the same way as the revocable trust. This can result in the generation of a defective grantor trust. When this happens, the grantor pays taxes on the income generated by the trust but the assets that are included in the trust are not included in the owners estate. These assets apply to the grantors estate for purposes of the estate tax. In this way, the individual will essentially own the property held by the trust. This is true for revocable trusts. In an irrevocable trust, the property gets transferred to the trust from the owners estate. The trust then owns the property. This is carried out by individuals to make sure that upon death, the property is passed down to a family member. A gift tax on the property value is implemented in such cases. Upon the death of the grantor, no estate tax is due. As per the grantor trust rules, when the assets are transferred to the trust, if the trust creator has a reversionary interest of more than 5% of the trust asset, then the trust becomes a grantor trust. The asset management and/or transfer after the grantors death are defined by the grantor trust agreement. Lastly, whether a trust is revocable or irrevocable, it is determined by the state laws. The implications of both are also defined by state law.

Related Topics

• Succession Planning
• Chartered Trust and Estate Planner
• Conservatorship
• Probate
• Cy Pres Doctrine
• Exordium Clause
• Non-Contestability (No Contest) Clause
• Bequest
• Per Stirpes
• Ademption
• Abeyance
• Elective Share
• Escheat
• Qualified Domestic Relations Order (QDRO) 
  
• Declaration of Trust
• Uniform Gifts for Minors Act
• Acceptance of Office by Trustee
• Beneficial Interest
• Asset Protection Trust
• Bare Trust
• Blind Trust
• Charitable Lead Trust
• Charitable Remainder Trust
• Charitable Remainder Annuity Trust
• Charitable Gift Annuity
• Credit Shelter Trust
• Discretionary Trust
• Generation Skipping Trust
• Grantor Trust Rules
• Living Trust
• Inter Vivos Trust
• Revocable Trust
• Irrevocable Trust
• Irrevocable Income-Only Trust
• Qualified Domestic Trust (QDOT)
• Qualified Terminal Interest Protection Trust (QTIP)
• ABLE Account
• Accumulated Income Payments (Canada)
• Charitable Split-Dollar Insurance Plan
• Coverdell Education Savings Account