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What Are Grantor Trusts and How Can They Be Changed?

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Definition: According to the Internal Revenue Code,  "grantor trusts" describe any trust where the person who created the trust property is treated as the owner for income and/or estate tax purposes.

And because of their position, the income of the trust will be taxed to the grantor and not the trust.

All "Revocable Living Trusts" are considered grantor trusts during the lifespan of the grantor. But not all "Irrevocable Trusts" are grantor trusts. An "Irrevocable Trust" can be treated as a "Grantor Trust" when the grantor meets the Internal Revenue Code requirements to become the owner of the assets. In this case, the "Irrevocable Trust" will be disregarded as a separate tax entity, and the grantor will be taxed for all income.

However, it is important to note that some

"Irrevocable Trusts" are called "Intentionally Defective Grantor Trusts", which means that the trust has been drafted to treat the grantor as the owner for income tax purposes, but not for estate tax purposes. What this means is that the grantor will be taxed on the trust income for income tax purposes but the trust assets will not be included in the grantor's estate when he or she dies.

State law and the trust instrument, also know as the trust deed, determine whether a trust is revocable or irrevocable.

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If the trust deed does not specify whether the trust is revocable, then most states will consider it revocable.

If you are interested in changing a trust, or learning more about revocable and irrevocable trusts, you can find more information here.

Category: Taxes

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