Grantor trust

Sections 671 to 679 of the tax code list the powers and benefits that make a trust a grantor trust. The most common are your power to revoke the trust and your right to receive its income. A power to swap the trust’s assets for others of equal value also counts, if it is held outside any role as trustee. Income that can go to your spouse counts the same as income for you.

A grantor trust’s income is taxed at your own rates, which are often lower than a trust’s. A trust that pays its own income tax reaches the top 37% rate above $16,000 of taxable income in 2026. A single filer reaches that rate only above $640,600. Under Revenue Ruling 2004-64, paying the tax on the trust’s income yourself is not a gift to its beneficiaries.

Grantor trust status is an income tax rule, and the estate tax has its own tests. A revocable living trust is a grantor trust, and its assets stay in your estate. An irrevocable trust can be a grantor trust for income tax and still sit outside your estate. Planners call such a trust an intentionally defective grantor trust (IDGT). Grantor retained annuity trusts (GRATs) and spousal lifetime access trusts (SLATs) are usually grantor trusts.

Under Revenue Ruling 2023-2, assets in an irrevocable grantor trust outside your estate miss the step-up at your death. Their basis stays what it was before your death, so the trust or its beneficiaries owe tax on the gain when they sell.