Which statement describes a Grantor trust's tax treatment?

Which statement describes a Grantor trust's tax treatment?

• A. The trust pays the income tax
• B. The trust is taxed as a separate entity
• C. The grantor is taxed on the trust's income
• D. The trust is tax-exempt

Answer: (C)

Grantor trusts are treated as if the grantor owns the trust’s income for tax purposes. Because the grantor retains certain powers or ownership benefits over the trust, the Internal Revenue Code wipes out the trust as a separate tax entity and makes the income taxable to the grantor on their personal return. That means the trust itself doesn’t pay income tax, and the grantor pays tax at their own rate on the trust’s income. This setup is why the correct statement is that the grantor is taxed on the trust’s income. The other options would imply the trust is taxed separately or is tax-exempt, which does not describe grantor trusts.

Grantor trusts are treated as if the grantor owns the trust’s income for tax purposes. Because the grantor retains certain powers or ownership benefits over the trust, the Internal Revenue Code wipes out the trust as a separate tax entity and makes the income taxable to the grantor on their personal return. That means the trust itself doesn’t pay income tax, and the grantor pays tax at their own rate on the trust’s income. This setup is why the correct statement is that the grantor is taxed on the trust’s income. The other options would imply the trust is taxed separately or is tax-exempt, which does not describe grantor trusts.