What Makes a Trust a Grantor Trust
Under IRC Sections 671–679, a trust is a grantor trust if the grantor retains certain powers or benefits — such as the power to revoke, the power to substitute assets, or the right to receive income. A revocable living trust meets this standard automatically.
Income Tax Treatment
All income earned by grantor trust assets is reported on the grantor's personal Form 1040. The trust itself does not file a separate income tax return (or files a simple informational return). There is no income tax benefit to holding assets in a revocable living trust.
Estate Tax Treatment
Grantor trust assets are included in the grantor's taxable estate for estate tax purposes. This means the assets receive a stepped-up basis at death — a significant benefit for appreciated California real estate.
Intentionally Defective Grantor Trust (IDGT)
An Intentionally Defective Grantor Trust is an irrevocable trust structured to be a grantor trust for income tax but not for estate tax. This allows the grantor to pay income taxes on trust income (effectively making tax-free gifts to trust beneficiaries) while removing assets from the taxable estate. A complex advanced planning strategy.
Disclaimer: This glossary entry is for general educational purposes only and does not constitute legal or tax advice. Laws change frequently and vary by individual circumstances. Consult a licensed California attorney or CPA for guidance on your specific situation.