Grantor Trust Rules

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DEFINITION of 'Grantor Trust Rules'

Guidelines that state a trust is considered to be a grantor trust if the grantor has a reversionary interest greater than 5% of the trust assets (at the time the transfer of assets to the trust is made). If a trust is considered to be a grantor trust, then the income from the trust will be taxed to the grantor, and not to the trust.

BREAKING DOWN 'Grantor Trust Rules'

Because the tax rates for trusts are much higher than for individuals, the grantor will often retain a revisionary interest in the trust so that the trust income is taxed at the grantor's rate instead of at the trust level.

If the grantor so chooses, a grantor trust may be amended so the grantor is no longer eligible to receive the benefits or able to control the trust, then the trust will effectively become a irrevocable trust. This will result in more taxes being paid on any income that is taxable to the trust, and not the beneficiaries.

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