What Is a Grantor Trust?

A grantor trust is a trust where the person who created it (the grantor) retains certain powers or rights that cause the IRS to treat the grantor as the owner of the trust's assets for income tax purposes. Because the grantor is treated as the owner, all income earned by the trust is reported directly on the grantor's personal tax return — the trust itself doesn't file a separate income tax return. The most common grantor trust is a revocable living trust, where the grantor retains the right to take back the assets at any time. Intentionally Defective Grantor Trusts (IDGTs) are a sophisticated estate planning tool that are intentionally designed to be grantor trusts for income tax but outside the grantor's taxable estate for estate tax — allowing the grantor to pay income taxes on trust earnings (effectively making tax-free gifts to the beneficiaries) without those payments being treated as additional taxable gifts. Grantor trust status can be triggered by a variety of retained powers, including the power to substitute assets, to add beneficiaries, or to borrow from the trust without adequate interest.