What Is a Special Needs Trust?
Special needs trusts allow a disabled beneficiary to receive inheritances, gifts, lawsuit settlements, or other funds and yet...Read more
One of the many factors to consider when setting up a trust is whether to make it a grantor trust or a non-grantor trust. While a grantor trust is more common, a non-grantor trust can be useful in certain circumstances.
A grantor trust is any trust in which the person setting up the trust (the “grantor”) retains some control over the trust. This could mean the grantor has the power to revoke the trust, change trust beneficiaries, change trust assets, or distribute income from the trust to the grantor or the grantor’s spouse, among other things. Including any provision that gives the grantor power over the trust will make a trust a grantor trust. Most trusts set up for estate planning purposes fall into this category. A non-grantor trust is any trust that is not a grantor trust, meaning the person who set up the trust has no rights, interests, or powers over trust assets.
That said, why should you care? The main difference between grantor and non-grantor trusts is how they are taxed. With a grantor trust, the grantor is responsible for paying tax on any income generated by the trust. Grantor trusts are often set up with the grantor’s Social Security number, so the income is reported directly on the grantor’s tax return. A non-grantor trust is taxed as a separate entity, so the trustee is responsible for filing a tax return for the trust. If the trust pays income to a beneficiary, the income is included in the beneficiary’s taxable earnings.
The structure of the non-grantor trust has tax benefits in some circumstances and it may be useful in the following situations:
Non-grantor trusts also have their downsides. They are much more expensive to set up and maintain. In addition, the grantor loses all control of the assets in the trust. Taxes are also steeper for a non-grantor trust.
To find out if a non-grantor trust is right for you, contact your attorney. To find an attorney near you, click here.