Grantor or Non-Grantor Trust?

The IRS sets the rules and regulations, which are complicated.

The differences between a grantor trust and non-grantor trust can often be key in estate planning. This is because they carry important tax implications. A grantor trust is one in which the person who created and funded the trust remains in control of it and the non-grantor trusts can be used to lower state income taxes.

Qualifying as a non-grantor trust requires that the grantor and the grantor’s spouse do not have beneficial enjoyment of trust property under Section 674 but there are some very important and useful exceptions to that rule, according to Wealth Management in “The Perils and Pitfalls of Grantor Trust Triggers.”

Among the important issues are:

• A reasonable definite standard limits the ability of the trustee to make distributions from the trust. This is known as the “HEMS” exception, since the standard can be health, education, maintenance or support.
• If a trust has multiple beneficiaries who each receive distributions of income and principle on a pro rata basis, it is an exception.
• If a trust has only one beneficiary, income and principle must be paid on a definite schedule to that beneficiary for the trust to be an exception.
• Neither the grantor nor the grantor’s spouse are a trustee, nor are more than 50% of the trustees in a subordinate position to them.

Reference: Wealth Management (June 19, 2018) “The Perils and Pitfalls of Grantor Trust Triggers.”