Series 22: 1.1.7.2.2. Taxation Of Grantor Trusts

1.1.7.2.2.  Taxation of Grantor Trusts

The IRS considers assets of a grantor trust to be owned by the grantor or any other funder of the trust. Therefore, the trust’s income and losses “flow through” for income tax purposes to the grantor or other owner as though the trust does not exist. Trust income and losses are taxed directly to the grantor or other contributor.

For income tax purposes, anyone who funds a grantor trust is an owner of the trust. If the trust is a direct participation program, both the grantor and its other investors own the trust’s assets in rough proportion to their contributions. As trustee, the grantor will direct the trust on how to allocate its assets. As beneficiaries, the other (passive) investors in the trust will receive certificates of beneficial interest. The sponsor, too, to the extent it has funded the program, is a beneficiary. Income and deductions “flow-through” to each of the owners, to be taxed on the grantors’ tax return.

IRC Sections 671 and 678