Grantor Trust Rules

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.

RELATED TERMS
  1. Irrevocable Beneficiary

    A beneficiary in a life insurance policy or segregated fund contract ...
  2. Intentionally Defective Grantor ...

    An estate planning tool used to freeze certain assets of an individual ...
  3. Income Trust

    An investment trust that holds income-producing assets and trades ...
  4. Grantor

    1. A seller of either call or put options who profits from the ...
  5. Irrevocable Trust

    A trust that can't be modified or terminated without the permission ...
  6. Distributable Net Income - DNI

    In the case of an income trust, an amount that is transferable ...
Related Articles
  1. Retirement

    Pick The Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  2. Personal Finance

    Special Trusts For Special Needs

    If you or someone you love has a disability, these trusts can help ease the cost of care.
  3. Insurance

    Encouraging Good Habits With An Incentive Trust

    Money can be a powerful motivator - why not use it to teach your heirs positive lessons?
  4. Retirement

    Establishing A Revocable Living Trust

    This arrangement allows you to have more control over your estate - both before and after your death.
  5. Tax Strategy

    Profit from Art with a Charitable Remainder Trust

    With a CRUT, art collectors can avoid capital gains taxes on the sale of art– while also leaving their favorite charity a legacy.
  6. Estate Planning

    Before You Agree to Be an Executor: Know This

    How to avoid 5 surprising hazards of being the executor of an estate.
  7. Taxes

    Why People Renounce Their U.S Citizenship

    This year, the highest number of Americans ever took the irrevocable step of giving up their citizenship. Here's why.
  8. Personal Finance

    The Top 6 Books for Estate Planning

    Here are six outstanding books that can help you with your estate planning.
  9. Estate Planning

    Estate Planning: 16 Things To Do Before You Die

    If you don’t plan your estate, your surviving family may have to deal with disputes and probate that were avoidable.
  10. Your Practice

    Advisors: $240B in Fees Up for Grabs by 2030

    Advisors have an opportunity to win generational assets over the next 15 years. Here are some tips on how to cater to different demographics.
RELATED FAQS
  1. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  2. Are estate planning fees tax deductible?

    Estate planning fees may be tax deductible, but only if certain conditions have been met. Internal Revenue Service (IRS) ... Read Full Answer >>
  3. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  4. How much money does Texas make from unclaimed property each year?

    In 2014, the office of the Texas Comptroller of Public Accounts reported $234 million in unclaimed property claimant liabilities, ... Read Full Answer >>
  5. Are Cafeteria plans subject to FICA, ERISA or FUTA?

    Cafeteria plans are employer-sponsored benefit plans that provide both taxable and nontaxable, or qualified, benefit options ... Read Full Answer >>
  6. How much money does Michigan make from unclaimed property each year?

    According to the 2013-2014 Annual Report of the State Treasurer, the state of Michigan earned only $82,875 in abandoned and ... Read Full Answer >>
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center