What is a Grantor Trust?

To be a grantor trust, the trust must meet specific rules set out in the Internal Revenue Code. There are several but the one that is used most frequently is that the grantor retains the right to remove assets from the trust. Only one rule has to be met in order for the trust to be classified as a grantor trust. In a grantor trust, the grantor is deemed to personally retain possession of the assets for income tax purposes and estate tax purposes. One of the primary advantages of the grantor trust is that the income from the trust is taxed to the individual at an individual rate as opposed to being taxed by the trust itself, since those tax rates are generally much higher.  The most common grantor trust in use is the revocable family living trust. Most trusts are of this type, but another type is the Qualified Personal Residence trust.  Also, an irrevocable trust can qualify as a grantor trust.