Donald M. Thompson - Wills, Trusts, and Estate Planning


Grantor Trust

A trust is a device where a trustee holds assets for the benefit of a beneficiary. There are all sorts of variations. A person who creates the trust and transfers the assets to the trust is said to be the grantor. The trust could require the income to be paid to the grantor or it could require the income to be paid to someone else. In estate planning the term "grantor trust" means the income of the trust is taxable to the grantor, regardless of who receives it under the terms of the trust.

It is possible to create a trust requiring all income to be paid to your children and yet to be taxable on the income yourself. This trust could (under a separate and different set of rules) be a completed gift for gift and estate tax purposes. Thus the trust assets, including any accumulated income, would not be part of your taxable estate. Nor would any appreciation in the value of the assets after the time of transfer be subject to gift or estate tax.

Because of grantor trust status you pay the income tax on the trust income instead of the children. This is not treated as a gift to the children, yet it results in a further transfer of assets to them.

The grantor will be treated as the owner of the income from the trust for income tax purposes when he or she retains certain powers or rights. If the grantor retains the right to the income of the trust, the right to revoke or amend the trust, the right to change beneficiaries or certain other powers, the grantor will be deemed the owner of the trust for estate tax purposes as well as income tax purposes.

The powers the grantor can retain and still have the trust assets outside his estate include power to withdraw the trust assets and substitute other property of equal value.

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Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
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