What is the Difference Between Grantor vs. Non-Grantor Trusts?

Grantor and non-grantor trusts are taxed m much differently. Non-grantor trusts are treated as separate entities (e.g., C-Corporation). However, the grantors of grantor trusts retain significant rights to the trust’s assets and income. Because of that retention of power, they’re treated as if they are direct owners of the trust assets.


Grantor Trust

A grantor trust is any trust in which the grantor is considered to be the owner of any portion of the trust. This is determined by a list of powers. Some of the most common powers are:

  • Power to substitute assets or borrow from trust without adequate security
  • Power to revoke
  • Power to distribute income from trust to Grantor or Grantor’s spouse
  • Power to add beneficiaries

There are other powers that cause a trust to be a grantor trust; a grantor only needs one of these powers for the trust to be a grantor trust.

Grantor trusts are taxed the following:

  • The IRS allows grantor trusts to use the grantor’s own Social Security Number (SSN) instead of having a separate Tax Identification Number (TIN).  
  • No matter the tax ID used, the income a grantor trust receives is taxable to the grantor and there is no separate tax return for the grantor trust. 
  • If a grantor trust uses a grantor’s SSN, the trust will need to apply for its own TIN upon the death of the grantor(s) when it becomes non-grantor.
  • Many grantors request a TIN anyway for privacy or other reasons.

Non-grantor Trust

A non-grantor trust often considered a “complex trust,” is any trust that is not defined as a grantor trust. Having a separate tax entity, a non-grantor trust is required to have its own TIN. Non-grantor trusts must pay taxes on income in the year received, which is historically at a higher rate of tax than for individuals. Occasionally, for planning purposes, a trust may be deemed a grantor trust partially, with the balance treated as either a simple or trust.

non-grantor trusts further are categorized as follows:
(1) simple trusts;

(2) complex trusts (and estates); and

(3) charitable remainder trusts.