For U.S. federal tax purposes, a grantor trust is a trust over which the grantor has retained certain interests or control.1 The grantor trust tax rules are found in IRC Sections 671 through 678.
A grantor typically retains these powers when the trust is revocable, meaning the grantor can revoke the trust, modify the trust agreement, substitute trust assets, change beneficiaries, or revest the trust assets to the grantor.
When the grantor retains certain powers over the trust, the income of the trust is taxed to the grantor, and the trust is not treated as a separate taxable entity for federal tax purposes. The grantor is subject to tax on the trust income even where the grantor does not actually receive any of the income.
U.S. Federal Income Tax Reporting
A grantor trust means that the income, expenses, credits, and other tax items related to the trust are reported directly on the grantor’s federal income tax return. For this reason, the trust itself is generally not required to file a trust income tax return, unlike a nongrantor trust.
In some cases, however, the grantor trust may need to file a Form 1041 (US Income Tax Return for Estates & Trusts) to notify the IRS that the trust is a grantor trust. The grantor will report the income directly on their federal income tax return. This filing is generally required when the grantor trust has an employer identification number (EIN) rather than using the grantor’s taxpayer identification number (TIN).
Please view our video tutorial here, which covers the rules and Form 1041 filing for a grantor trust.
The Form 1041 is filed with the IRS and a “grantor letter” is provided to the grantor to complete their income tax return.
Other Information
Taxpayers can find more information regarding the taxation of trusts by viewing the IRS Form 1041 instructions.