A grantor trust is a trust in which the individual who creates the trust is the owner of the assets and property for income and estate tax purposes. All grantor trusts are revocable living trusts, while the grantor is alive.
How is a revocable living trust taxed?
Revocable trusts are the simplest of all trust arrangements from an income tax standpoint. Any income generated by a revocable trust is taxable to the trust’s creator (who is often also referred to as a settlor, trustor, or grantor) during the trust creator’s lifetime.
How does a revocable living trust tax return work?
As a result, the IRS still taxes the Grantor on the Trust income. Because the Trust can utilize the Grantor’s social security number to establish investments and bank accounts, all of the income related to the Trust can be reported on the Grantor’s tax return. No separate tax return will be necessary for a Revocable Living Trust.
Do you have to file tax return for grantor trust?
Therefore, any taxable income or deduction earned by the trust will be taxed on the grantor’s tax return. In most cases, there will not even be a requirement to file a trust income tax return, as the income of the trust assets can be reported with your social security number.
Why are grantor trusts used as tax havens?
Grantor trusts were originally used as a tax haven for wealthy people. The tax rates graduated at the same rate as income tax rates. As more and more income was earned in the trust, the income was taxed at the personal income tax rates.
How does a living trust work in estate planning?
A Living Trust is typically a Revocable Trust, meaning the Grantor may remove Trust assets at any time. These types of Trust are often used as Estate Planning tools because they can help the Grantor avoid having his or her assets got through the Probate process upon the Grantor’s death.
