Grantor Trusts Income Tax Rules
Grantor trusts benefit the grantor---the individual who sets up the trust---and allow for an orderly distribution of assets after the individual dies. Trusts of any kind require a trustee; however, in the case of grantor trusts, the trustee can be the same person as the grantor. Grantor trust owners should adhere to income tax rules and be mindful of other taxes that could incur.
Other People Are Reading
-
Income Tax Liability
-
Because grantor trusts provide the grantor with income during his lifetime, the grantor must report it as ordinary income on his personal taxes. He also retains the power to change the trust at any time during his lifetime. Because of this, the income tax liability is solely that of the grantor. Therefore, for income tax issues, the trust really does not exist because it does not pay taxes as a separate entity.
Tax Identification
-
If the grantor and trustee are the same person, a separate tax identification number is not needed. In this case, the grantor's Social Security number would be used for income tax purposes. If the grantor and trustee are not the same person, the trust itself would have to have a separate tax identification number.
-
Other Tax Issues
-
In addition to income tax issues, potential gift and estate tax issues should be addressed. Grantor trusts do not provide any estate tax benefits. When the grantor dies, the trust will be considered in his gross estate and could incur estate taxes. This is different from other types of trusts, called irrevocable trusts, which are not included in the gross estate. Gift taxes may incur if gifts are given out of the trust in excess of the annual exclusion ($13,000 in 2010). Both of these tax rates are progressive, projected to max out at 55 percent in 2011.
-
References
- Photo Credit TAX TIME image by brelsbil from Fotolia.com
