Revocable versus Grantor Trusts

Course: Estate Planning
Lesson 9: Income Taxation of Trusts and Estates

Student Question:

Can you refer me to a comparison (or just write a few notes) on how a grantor trust differs from a revocable trust and how a non-grantor trust differs from an irrevocable trust? They seem synonymous respectively to each other. Thank you!

    Instructor Response:

    Trusts can be described in a number of ways including revocability and income taxation.

    • A revocable trust can be revoked or amended by the grantor. 
    • Although all trusts must have a grantor, not all trusts are grantor trusts to the IRS.  A grantor trust is any trust in which trust income must be taxed to the grantor on his or her individual income tax return, even if the income is retained by the trust or paid to someone other than the grantor. The IRS considers a trust a grantor trust if the grantor retains “prohibited powers” such as the right to substitute trust principal in the future.  KEY POINT – even if the grantor does NOT retain the right to revoke the trust, the grantor’s retention of a prohibited power creates a grantor trust in the eyes of the IRS.