What is the term for a trust that results in the grantor being taxed on the trust's income?

What is the term for a trust that results in the grantor being taxed on the trust's income?

• A. Irrevocable trust
• B. Charitable remainder trust
• C. Grantor trust
• D. Testamentary trust

Answer: (C)

In a grantor trust, the grantor is treated as the owner of the trust income for tax purposes. Because the grantor retains certain powers or interests over the trust, the Internal Revenue Code makes the grantor responsible for reporting all the trust’s income on their own personal tax return and paying the taxes, rather than the trust paying its own tax. This means the tax burden effectively flows through to the grantor, even if the trust doesn’t distribute the income to anyone. That defining tax treatment is what identifies this as a grantor trust, distinguishing it from other trusts where the trust or the beneficiaries bear the tax.

In a grantor trust, the grantor is treated as the owner of the trust income for tax purposes. Because the grantor retains certain powers or interests over the trust, the Internal Revenue Code makes the grantor responsible for reporting all the trust’s income on their own personal tax return and paying the taxes, rather than the trust paying its own tax. This means the tax burden effectively flows through to the grantor, even if the trust doesn’t distribute the income to anyone. That defining tax treatment is what identifies this as a grantor trust, distinguishing it from other trusts where the trust or the beneficiaries bear the tax.