What's The Difference Between A Grantor and Non-Grantor Trust?
A grantor trust is a type of trust where the person who establishes the trust, known as the grantor, retains certain powers or interests in the trust. This causes the trust's income to be taxed to the grantor, rather than the trust itself or the trust's beneficiaries.
The key characteristics of a grantor trust include:
The key characteristics of a Non-grantor trust include:
On the other hand, a non-grantor trust is a trust where the grantor relinquishes all control and benefits from the trust. The key features of a non-grantor trust are:
- Separation from the Grantor: The grantor does not retain any powers or interests in the trust. Once established, the trust is entirely separate from the grantor.
- Taxation: In a non-grantor trust, the trust itself is responsible for paying taxes on its income, or in some cases, the beneficiaries may pay tax on the distributions they receive.
- Irrevocability: Non-grantor trusts are often irrevocable, meaning the grantor cannot alter or terminate the trust after its creation.
Choosing the right trust for you:
The main difference between the two types of trusts lies in the degree of control and involvement the grantor retains over the trust and its assets, as well as how the trust's income is taxed. Grantor trusts are often used for estate planning purposes to take advantage of certain tax strategies, while non-grantor trusts are typically used for asset protection to provide a clear separation of assets for the benefit of the beneficiaries.