Grantor Trust
A trust whose income is taxed to the person who created it, even when the assets are held for others — the default for most revocable living trusts.
Under the grantor-trust rules, the person who funded the trust pays the income tax on its earnings, which (counterintuitively) lets the trust assets grow tax-free for the beneficiaries — a deliberate estate-planning feature. The result is that a trust's income can land on your personal return even though the assets aren't “yours.” Tracing which dollars belong to which entity is what keeps this legible at tax time.
The grantor pays the tax
Under the grantor-trust rules, the person who created and funded the trust is treated as the owner of its income for income-tax purposes — so the trust's earnings are reported on the grantor's personal return, even when the assets are held for someone else. A specific set of powers retained over the trust (in the tax code) is what causes this treatment.
Why that's a deliberate feature
Paying the trust's income tax out of your own pocket lets the trust assets compound tax-free for the beneficiaries — effectively an additional, tax-free gift each year that doesn't use your gift exemption. That's why “intentionally defective grantor trusts” are a staple of estate planning: the trust is outside your estate for estate tax, but you keep paying its income tax to supercharge its growth. The counterintuitive result is trust income landing on your 1040.
How Formation handles it
Formation traces which dollars belong to which entity, so when a grantor trust's income flows onto your personal return you can see where it came from instead of puzzling over a K-1 at tax time. Organizing accounts by entity keeps the grantor-trust mechanics legible for you and your CPA.
A worked example
Your grantor trust earns $80,000 of income for your grandchildren. You pay the income tax on that $80,000 from your personal funds — which shrinks your taxable estate further and lets the full $80,000 keep compounding inside the trust for the grandkids, all without using any gift exemption.
Frequently asked
Who pays the tax on a grantor trust?
The grantor — the person who created and funded it — reports the trust's income on their personal return and pays the tax, even though the assets are held for the beneficiaries.
What makes a trust a grantor trust?
Retaining certain powers or interests defined in the tax code — such as the power to substitute assets of equal value. These powers cause the income to be taxed to the grantor, which is often intentional for estate-planning reasons.
In Formation
Track income by entity
Related terms
See this in your own numbers.
Formation organizes your whole household by entity and cites every figure to its source — the context that makes terms like this actionable.
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