Grantor trusts "are trusts over which the grantor (or grantor’s spouse) retain substantial control. The income from a grantor trust is generally taxed to the grantor, not to the trust or beneficiaries".
A grantor trust exists if any of the listed conditions are present:
a) The grantor (or grantor’s spouse) has a reversionary interest that is worth more than 5% of either the corpus or the income of the trust.
b) The grantor controls the beneficial enjoyment of the trust. The grantor retains the power to:
- add more beneficiaries, if it results in the transfer of beneficial shares in the trust fund or;
- use trust property without proper compensation,
- distribute the income between the trust beneficiaries.
c) The grantor has particular administrative powers eg.:
- to deal with trust property in a nonfiduciary capacity,
- to borrow the trust assets without adequate security or interest,
- to deal with trust fund for less than full and adequate consideration.
d) The grantor has the right to revoke the trust.
e) Trust income will be distributed to the grantor as he or she is treated as the owner of any part of the trust.
Types of Grantor Trusts
The most common examples of grantor trusts include:
Retained Interest Trusts inluding:
- Qualified Personal Residence Trust (QPRT),
- Grantor Retained Annuity Trust (GRAT),
- Revocable Trust (also called as a Living Trust).
Intentionally Defective Grantor Trust (IDGT)
IDGT is a completed transfer to a trust fund for transfer tax purposes, but unfinished "defective" transfer for income tax purposes. The main features of the IDGT are following:
- the grantor, not the beneficiary, is taxed on all income of the trust, even if he or she is not entitled to any distributions of trust.
- The future value of the transferred assets is removed from the grantor’s gross estate on the day the trust fund is financed.
- The trust may be outside of the grantor’s property for real estate tax and donation purposes, if the grantor has not retained any rights that would result in estate tax inclusion.
- As a result of the above rights retained by the grantor, the trust is seen as grantor trust for income tax purposes.
Tax advantages of a grantor trust
Grantor trusts have significant tax advantages over individuals. Especially if a trust has grantor trust status. This gives the grantor ownership status over the trust. In addition to trusts having more defined tax brackets than individuals, they provide estate and gift tax advantages over individuals. The trust's assets can appreciate income tax-free, providing the grantor with estate and gift tax advantages. However, the grantor must pay income tax on any income earned in the trust for the above benefits to apply.
- Whittington O. R., Delaney P. R., 2011
- Mitchell W. D., 2008, p. 12-6; 12-7; 12-8
- Bove A. A. Jr., 2005, p. 279
- Madoff R. D., Tenney C. R., Hall M. A., Mingolla L. N., 2008, p. 8-65, 8-66
- Mitchell W. D., 2008, p. 12-9
- Bove A. A. Jr., (2005), The Complete Book of Wills, Estates & Trusts: Advice that Can Save You Thousands of Dollars in Legal Fees and Taxes, Henry Holt and Company, New York,
- Madoff R. D., Tenney C. R., Hall M. A., Mingolla L. N., (2008), Practical Guide to Estate Planning, CCH, Chicago,
- Mitchell W. D., (2008), Estate & Retirement Planning Answer, CCH, Chicago,
- Sheinfeld M. M., Witt F.T., Hyman M. B., (2018), Collier on Bankruptcy Taxation, LexisNexis, New York,
- Whittington O. R., Delaney P. R., (2011), Wiley CPA Examination Review, Outlines and Study Guides, John Wiley & Sons, Hoboken.
Author: Angelika Marzecka