Tips From the Pros: Unexpected Consequences of Irrevocable Grantor TrustsTips From the Pros: Unexpected Consequences of Irrevocable Grantor Trusts

A grantor trust is a trust that’s recognized under state law for property disposition purposes but for federal and state income tax purposes¹ is completely invisible.² All items of income, deduction and credit generated by and with respect to assets held in the trust are reportable by the individual who created and funded the trust (the grantor)³ on his income tax returns as if he’d never created the trust.⁴ Put another way, the grantor is considered the owner of the trust for income tax purposes.⁵

All readers of Trusts & Estates are well familiar with the main estate-planning advantages of irrevocable trusts that are structured as grantor trusts. Any transaction at the trust’s creation, for example, a sale by the grantor to the trust, is...