The term grantor trust is used to describe an arrangement where the donor of the assets retains control over the trust. In a grantor trust, the donor is normally both a beneficiary as well as a trustee.
There are two principal types of trusts: grantor and non-grantor. A trust is first established by a donor, also known as a grantor, which is the entity that provides the assets to the trust. When the donor retains control over both the assets in the trust and the income derived from those assets, it is classified as a donor trust. With this type of trust, the donor retains their ability to revoke, amend, or terminate the trust.
The difference between grantor and non-grantor trusts is important from an income tax standpoint. Since the donor retains control over the assets and income in the trust, and is also the trust’s beneficiary, the income and deductions derived from the trust must appear on the donor’s Form 1040.