The Taxation of Trusts: Grantor Trusts vs. Non-Grantor Trusts

One of the most common questions I receive relates to the taxation of trusts. Today, we’ll discuss a basic overview of how trusts are taxed. Ultimately, the short answer is: it depends. You’ll often hear me talk about two types of trusts—revocable and irrevocable—but for tax purposes, these can be classified as either grantor or non-grantor trusts.

Non-Grantor Trust
A non-grantor trust is treated as a separate taxable entity. It files its own Form 1041 to report any taxable income. However, if income is distributed to a beneficiary, the trust itself does not pay tax on that distributed income; rather, the beneficiary who receives the income is responsible for reporting and paying taxes on it. Typically, irrevocable trusts are classified as non-grantor trusts, although they can sometimes be grantor trusts as well.

Grantor Trust
A grantor trust, on the other hand, is not treated as a separate taxable entity. All taxable activity “flows through” the trust and is reported on the grantor’s personal tax return (Form 1040). Even if the trust retains the income rather than distributing it to a beneficiary, the designated grantor is still responsible for paying taxes on any trust income. Most revocable trusts are considered grantor trusts for tax purposes.

In summary, a grantor trust “pushes” all taxable income through to the grantor, who reports it on their personal tax return. A non-grantor trust files its own tax return and pays taxes on income it retains, but beneficiaries pay taxes on any income distributed to them.