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. Grantor trust rules are the rules that apply to different types of trusts. All grantor trusts are revocable living trusts, while the grantor is alive.
What is the point of a grantor trust?
The typical purpose of the trust is to create a vehicle allowing the grantor to preserve the wealth he/she has accumulated in a trust that provides assets protection for their beneficiaries, minimizes the ultimate tax burden to the beneficiaries, and keeps the assets out of the grantor’s taxable estate at death.
Is a grantor trust required to file a tax return?
Typically, a trust must file a separate income tax return for each calendar year. However, for most grantor trusts, filing a separate tax return is optional. The general rule and the alternative methods of reporting are described below.
How is the sale of a grantor trust treated?
By having the property transferred to the trust treated as the property of the individual for income tax purposes, a sale of property by the grantor to the trust is treated as a transfer from the grantor to himself. Under Rev Rul 85-13, the transaction is not a sale for income tax purposes.
Are there income tax implications for a grantor trust?
The trust that you established for estate planning purposes may have some interesting income tax considerations. Be aware of who pays the income tax on the trust income, the opportunities with grantor trust planning, and the income tax effect and distribution planning opportunities for non-grantor trusts.
Is the grantor trust considered a disregarded entity?
A grantor trust is considered a disregarded entity for income tax purposes. Therefore, any taxable income or deduction earned by the trust will be taxed on the grantor’s tax return.
What makes a defective grantor trust a defective Trust?
A defective grantor trust is a trust that has been carefully drafted so that the transfer of property to the trust is not a gift for gift and estate tax purposes and is not a sale for income tax purposes.
