What Is a Grantor Trust?

1. What Makes a Trust a Grantor Trust?

A trust is a grantor trust when the grantor keeps one of the powers or benefits listed in sections 671 to 679 of the Internal Revenue Code. Section 671 says what follows. The income, deductions and credits of the part of the trust the grantor is treated as owning are counted on the grantor’s own return, as if the trust were not there for income tax purposes. The grantor is the person who created the trust, the same person Florida’s trust code calls the settlor.

The sections that follow list the triggers. The main ones are these.

• Section 673, a reversion. The grantor keeps a right to get the property back worth more than 5 percent of the trust at the start.
• Section 674, control over who benefits. The grantor, or someone without an adverse interest, can decide who receives income or principal without the consent of a person whose interest would be hurt.
• Section 675, administrative powers. The grantor can deal with trust property for less than full value, has borrowed from the trust and not repaid the loan before the year begins, or holds a power to take back trust assets by substituting other property of equal value.
• Section 676, the power to revoke. The grantor, or someone without an adverse interest, can take the property back.
• Section 677, income for the grantor. Trust income is or may be paid to the grantor or the grantor’s spouse, or held for them later.
• Sections 678 and 679 reach two special cases, a person other than the grantor who can withdraw the property, and a foreign trust with American beneficiaries funded by an American.

A trust that trips none of these is a non grantor trust, a separate taxpayer that files its own return. Our page on whether your trust needs a tax return covers the filing side.

2. Why Is a Revocable Trust a Grantor Trust?

A revocable trust is a grantor trust because the grantor can take the property back, which is the section 676 trigger. The Code treats the grantor as the owner of any part of a trust that the grantor can revest in himself or herself. Every revocable living trust therefore changes nothing on its creator’s income tax return. The interest, dividends and capital gains the trust earns go on the grantor’s Form 1040 at the grantor’s rates, exactly as before the trust was signed.

Florida law lines up with the tax result. While a trust is revocable, Florida says the trustee’s duties are owed only to the settlor, and the grantor’s creditors can reach the trust property to the same extent they could reach it if the grantor owned it directly. The rules on who the trustee answers to and on creditors and your own trust explain both. A revocable trust is a probate tool, not a tax shelter and not a creditor shield.

3. Does a Grantor Trust Use the Grantor’s Social Security Number?

Usually yes. Treasury regulations let the trustee of a trust owned by one grantor give the bank and the brokerage firm the grantor’s name and Social Security number instead of a separate trust number, and the IRS instructions for Form SS-4 tell the trustee of such a trust not to apply for one. The accounts then issue their 1099s to the grantor, and the trust files no return of its own.

A married couple’s joint trust works the same way when they file jointly. The exceptions arise when the trust uses a reporting method other than the grantor’s number, or when a bank’s own policy insists on a separate number. A bank that asks for one is following its own procedure rather than the tax code, and our guide on how to get an EIN for a trust covers when a separate number is truly required.

4. What Happens to a Grantor Trust When the Grantor Dies?

Grantor trust status ends at death, because the person the Code treated as owner is gone. A revocable trust becomes irrevocable and becomes its own taxpayer. Treasury regulations require a trust that was entirely owned by the decedent to obtain a new taxpayer identification number at death if the trust will continue, and from then on the trust files Form 1041 for any year it has gross income of $600 or more. Income the trust keeps is taxed to the trust, and income it distributes is generally taxed to the beneficiaries who receive it. Our page on whether beneficiaries pay taxes on trust distributions covers that split.

Basis follows the estate tax. Property in a revocable trust is included in the grantor’s taxable estate, because the grantor could revoke the trust, so the heirs generally receive a basis equal to the value at death. A house bought for $150,000 and worth $500,000 at death can be sold soon after for $500,000 with little or no capital gain. Our page on the step-up in basis covers the rule, and our guide to what happens to a trust when the grantor dies covers the rest of the first year.

The successor trustee handles the change, usually through the trust’s accountant, and the trust administration fee covers setting it up.

5. What Is an Intentionally Defective Grantor Trust?

An intentionally defective grantor trust is an irrevocable trust drafted so that its property stays out of the grantor’s taxable estate while its income is still taxed to the grantor. The defect is deliberate. The grantor keeps a power the income tax rules count and the estate tax rules do not, most often the section 675 power to take back trust assets by substituting other property of equal value.

Families use the arrangement because of who pays the tax. When the grantor pays the income tax on the trust’s earnings, the trust grows without paying tax of its own and the grantor’s estate shrinks by every dollar of tax paid. Florida supports the design with a statute that lets the trustee reimburse the grantor for the income tax in the trustee’s sole discretion, unless the trust says otherwise, and a separate rule that such a reimbursement power does not by itself expose the trust to the grantor’s creditors. Our page on paying the grantor’s tax bill covers the reimbursement statute.

The trade-off appears at death. In Revenue Ruling 2023-2 the IRS confirmed that assets of an irrevocable grantor trust that are not included in the grantor’s taxable estate generally do not receive the step-up in basis. The heirs keep the grantor’s old basis, so an intentionally defective grantor trust suits families whose estates would owe estate tax, and a simple revocable trust suits most others. Our guide to the Florida irrevocable trust compares the kinds.

What Does a Grantor Trust Cost to Set Up?

A revocable trust drafted on its own, which is always a grantor trust, is a flat fee from $2,400, and $3,200 for a couple. The Complete Trust Plan, which adds the will, the power of attorney, the health-care documents and a deed moving the home into the trust, is a flat fee from $3,200. An irrevocable grantor trust depends on the structure and the assets, so it is a flat fee quoted at consult, coordinated with your accountant. Recording and other government costs are additional and passed through at cost. Advertised fees are honored for 90 days from the posted date.

Frequently Asked Questions

Common Situations

The retiree who worries about a second tax return. A retired couple hesitates to sign a living trust because they expect a new return every April. Their trust is a grantor trust, so their brokerage account keeps reporting under their own Social Security numbers and they file exactly what they filed before.

The daughter who becomes trustee. A father dies and his daughter takes over as successor trustee. She obtains a new number for the trust, retitles the accounts, and the trust files its first Form 1041 the following spring for the income earned after his death.

Sources of Law

• 26 U.S.C. §671 (grantor treated as owner; income, deductions and credits counted on the grantor’s return); §673(a) (reversion over 5 percent); §674(a) (power to control beneficial enjoyment); §675(1),(3),(4)(C) (dealing for less than full value; borrowing not repaid before the taxable year; power to substitute property of equivalent value); §676(a) (power to revoke); §677(a) (income for the grantor or spouse); §§678, 679 (persons other than the grantor; foreign trusts). US Code, 2024 edition.
• 26 U.S.C. §§1014, 2038 (basis at death; revocable transfers included in the estate); §6012(a)(4) (trust return at $600 of gross income).
• Treas. Reg. §1.671-4(b)(2)(i)(A) (trustee furnishes the grantor’s name and number to payors); §1.671-4(h) (new number required at the decedent’s death if the trust continues). Instructions for Form SS-4 (certain grantor-type trusts do not apply for a number). Rev. Rul. 2023-2, 2023-16 I.R.B. (no basis adjustment for irrevocable grantor trust assets outside the gross estate).
• Fla. Stat. §736.0505(1)(a),(c) (revocable trust reachable by the settlor’s creditors; a tax reimbursement power does not alone expose an irrevocable trust); §736.0603(1) (duties owed to the settlor while revocable); §736.08145 (trustee may reimburse the grantor’s income tax).
• Case retold below: Rothstein v. United States, 735 F.2d 704 (2d Cir. 1984). Opinion read in full; retrieved September 30, 2026.

The Father Who Bought Back His Children’s Stock

In one case I have reviewed, a single purchase turned an ordinary family trust into a grantor trust, and the family spent seventeen years finding out what that meant.

In 1957 a Connecticut businessman gave his 300 shares of a warehouse company to an irrevocable trust for his three children, with his wife as trustee. The company never paid a dividend. In 1964 he bought his partner’s 300 shares for $500,000, and then bought the trust’s 300 shares from his wife, as trustee, for $320,000, paid with his unsecured note at 5 percent. Early in 1965 he owned the whole company, dissolved it, took its buildings, refinanced them with a $700,000 mortgage, and only then gave the trust a second mortgage to secure his note. On his return he deducted $16,000 of interest paid to the trust and reported a small loss on the dissolution. The IRS said that by buying on credit from a trustee who was his own wife, without security, he had borrowed from the trust, which made him the owner of the trust for income tax purposes. The IRS disallowed the interest and cut his basis in the shares from $320,000 to the $30,000 he had originally paid, for a deficiency of $56,664. He paid in 1967 and sought a refund. The IRS held his protest for more than five years, and he died before the case was tried.

The federal Court of Appeals for the Second Circuit agreed with the IRS in 1984 that the purchase was a borrowing, so he was treated as owning the trust. The court then held that owner treatment moves the trust’s income and deductions onto his return rather than erasing his dealings with the trust, so he kept a $320,000 basis in the shares he bought, and the trust’s interest income was taxed to him. The court sent the case back to recompute the tax.

My reading of that case is that the father was reorganizing a business, not dodging a tax, and the trust’s paperwork did not keep up with him. In reading the decisions on grantor trust status, I have a few take-home points.

The first is that grantor trust status can switch on by conduct. A loan from the trust to its creator, made by a trustee who is the creator’s spouse or employee, is on the list. Avoid any purchase or loan between a grantor and a family trust without adequate interest, adequate security and a trustee who is independent of the grantor.

The second is that the same rules are now used on purpose. An intentionally defective grantor trust is built on a power listed in the Code, and a trust that becomes a grantor trust by accident carries the same tax bill without any of the planning.

The third is timing. The note in that case was secured three months after the sale, and the tax year had already turned. Paperwork that trails the transaction is where these cases are decided.

Every irrevocable trust I prepare, flat fee quoted at consult, states in the document whether it is meant to be a grantor trust and which power makes it one. One limit is worth stating plainly. The decision comes from the federal appeals court covering New York, Connecticut and Vermont, not Florida, and it was sent back for a new computation, so the opinion does not report the final tax.

Kevin D. Klagge, Esq., admitted in Florida since 2012. The case described above is a decision of a federal court rather than a matter handled by this firm. Past results do not guarantee a similar outcome.

Updated on September 30, 2026. Reviewed by Kevin D. Klagge, Esq., Fla. Bar No. 99502. Attorney Kevin Klagge represents families, businesses, and international clients in estate and tax planning, business structuring, and international law, with a focus on Florida legal tools. He litigates estate and business issues in court. General information about Florida law, not legal advice, and no attorney-client relationship is created. Do not send confidential information until we have agreed to represent you.