A grantor trust is a trust in which the grantor or settlor (the person creating the trust) retains control over the assets placed in the trust—or the income from the assets placed in the trust—to such an extent that the grantor or settlor is taxed on the trust’s income. For example, a revocable trust (a trust that may be revoked) is a grantor trust.
The controls retained by a grantor or settlor that may result in tax liability for the grantor or settlor are set out in the Internal Revenue Code (IRC), in the United State Code (federal statutes) at 26 U.S.C. §§ 671-677.
In Texas, as in other states, a grantor trust is defined by the relationship between the grantor and the trust's assets or income. If the grantor retains certain powers or benefits, such as the ability to revoke the trust or control over the trust's income, the trust is considered a grantor trust for tax purposes. The specific rules governing what constitutes a grantor trust are outlined in the Internal Revenue Code (IRC) at 26 U.S.C. §§ 671-677. These federal statutes dictate that if the grantor retains certain interests or powers over the trust, the income it generates may be taxable to the grantor. This includes revocable trusts, which are commonly used in estate planning. Texas state law will generally follow these federal guidelines for tax purposes, and the grantor's retained control or interest in the trust will determine their tax liability.
