TikTok Trusts, Part II: Grantor vs. Non-Grantor Trusts – What’s the Difference?
SUMMARY– Grantor vs. Non-Grantor Trusts, Explained Simply
Not all trusts are taxed the same way. In this article, we explain the key differences between grantor and non-grantor trusts—two foundational categories in estate planning:
Grantor Trusts: The person who creates the trust (the grantor) retains certain powers and pays income taxes on the trust’s earnings. These are common in revocable living trusts and some advanced irrevocable strategies.
Non-Grantor Trusts: The trust is its own taxpayer. It pays tax on income it keeps and gets a deduction for income it distributes. Beneficiaries then pay tax on what they receive.
Why it matters: Trusts hit the top federal income tax rate (37%) after just $15,650 of income (2025), so understanding how a trust is taxed—and who pays—can make a big difference in long-term planning.
Planning Tip: Irrevocable non-grantor trusts can offer tax benefits and asset protection, but they’re best used in more complex planning scenarios.
Trusts are powerful tools, but choosing the right type (and knowing how it works) is key to protecting your assets and passing on wealth wisely.
Beyond the Buzzwords: How Trust Type Affects Taxes and Your Estate
In our previous article, "TikTok Trusts: Defusing the Myths of Social Media Estate Planning," we explored how estate planning—and trusts in particular—have become the subject of viral videos and bite-sized financial and estate planning advice online. While it’s encouraging to see more people talking about financial planning, we emphasized the importance of separating online entertainment from real-life, personalized planning. A trust might be a valuable tool in your estate plan—but the type of trust matters greatly and can have significant effect on both your legacy and your balance sheet.
This brings us to the next essential concept in our series: Grantor vs. Non-Grantor Trusts.
These two categories of trusts differ significantly in how they are structured, how they are taxed, and the role they play in your overall estate and financial plan. While the language may sound technical, the ideas are foundational—and understanding them can help you make more informed decisions for yourself and your loved ones.
A Quick Refresher: What Is a Trust?
At its core, a trust is a legal arrangement where one party—the “grantor” (or sometimes multiple grantors, as in the case of a joint trust between spouses)—places assets into a trust to be managed by a “trustee” for the benefit of one or more “beneficiaries.” The grantor is the person who creates and funds the trust. The trustee is the individual or institution responsible for managing the trust’s assets according to its terms. The beneficiaries are the people or organizations who will ultimately benefit from the trust, either through income distributions, asset transfers, or both.
Trusts can be used to:
Avoid probate
Provide privacy
Manage assets across generations
Minimize estate taxes
Protect assets from creditors or irresponsible spending
But once we decide a trust makes sense, the next big question becomes: Should this be a grantor or a non-grantor trust?
What Is a Grantor Trust?
A “grantor trust” is a trust in which the person who creates the trust—the grantor—retains certain powers or ownership-like rights over the trust assets. Because of this retained control, the IRS considers the grantor the owner of the trust for income tax purposes.
How Is a Grantor Trust Taxed?
Even though the assets are legally owned by the trust, the IRS looks through the trust and attributes all income, deductions, and credits back to the grantor or grantors personally. This means:
The trust itself does not pay income taxes (which could be a good thing – see below).
Instead, all trust income is reported on the grantor's individual tax return.
The grantor pays tax at their own personal income tax rate.
Why Choose a Grantor Trust?
Grantor trusts are often used for revocable living trusts, which are the most common type of trust in basic estate planning. These trusts are flexible, easy to amend or revoke, and allow you to maintain control over your assets during your lifetime. In most revocable living trusts, the grantor also serves as the trustee, which makes management simple and seamless while the grantor is alive and well.
But not all grantor trusts are revocable. In fact, some irrevocable trusts are also structured to be treated as grantor trusts for income tax purposes. This may sound contradictory—how can a trust be irrevocable but still taxed to the grantor? It comes down to the specific powers retained by the grantor under IRS rules.
For example, if the grantor retains the power to substitute trust assets or control certain aspects of trust income or administration (even if they can’t take the assets back), the trust may be considered a grantor trust for tax purposes. This means the grantor is still responsible for paying income tax on the trust's earnings, even though the trust is irrevocable and the grantor cannot use the trust assets to pay the tax.
You may be thinking, “why in the world would someone want that?” There are a few strategic reasons:
· Estate tax planning: The assets may be removed from the grantor’s taxable estate, but the grantor still pays the income tax, which allows the trust assets to grow without being depleted by taxes and allows the grantor to deplete their taxable estate below the federal estate tax exemption.
· Wealth shifting: The grantor’s payment of the tax is not considered a gift, effectively allowing them to "gift" tax payments on behalf of the trust beneficiaries.
This strategy is commonly used in more advanced estate planning tools such as Intentionally Defective Grantor Trusts (IDGTs), Spousal Lifetime Access Trusts (SLATs), and Irrevocable Life Insurance Trusts (ILITs). In these cases, the trust is irrevocable, but still taxed to the grantor—a powerful combination for long-term planning.
So, while grantor trusts are frequently used in simple revocable living trust planning, they also play a key role in more complex irrevocable trust strategies—especially when tax efficiency and legacy preservation are top priorities.
It’s important to note, however, that all grantor trusts—revocable or irrevocable—typically become “non-grantor trusts” upon the grantor’s death, at which point the trust becomes its own taxpayer and is subject to a different set of income tax rules.
So What Is a Non-Grantor Trust?
A “non-grantor trust” is a trust in which the grantor gives up control over the trust assets and does not retain certain powers that would otherwise cause the trust’s income to be taxed to them personally. In this case, the IRS treats the trust—not the grantor—as the taxpayer. As noted earlier, a trust can also become a non-grantor trust upon the death of the grantor, since there is no longer an individual with the powers or authority required to classify it as a grantor trust.
In both situations, the trust becomes its own distinct tax entity, requiring a separate tax identification number and its own income tax return.
How Is a Non-Grantor Trust Taxed?
A non-grantor trust is treated as its own taxpayer, which means it must report and pay income tax on any income it retains. However, if the trust distributes income to its beneficiaries, that income is passed through to the beneficiaries, who then report it on their personal tax returns and pay the associated tax.
Here’s how this works: the trust receives a deduction for the income it distributes. This prevents the same income from being taxed twice. Essentially, the trust is taxed on what it keeps, and the beneficiaries are taxed on the income they receive from the trust’s assets.
This matters because trusts are subject to the highest federal income tax rate (currently 37%) after just $15,650 of taxable income (as of 2025). That’s a much lower threshold than for individuals. As a result, even modest income retained in a trust can face steep taxes. Understanding how trust income is taxed — and how distributions can shift that burden to beneficiaries in lower tax brackets — is a key part of effective trust planning.
To summarize:
· The trust pays tax on income it retains.
· The trust gets a deduction for income it distributes.
· Beneficiaries pay tax on income they receive from the trust.
· Non-grantor trusts hit the top federal income tax rate at just $15,650 of taxable income (2025), while individuals reach that same rate at much higher income levels.
Why Choose a Non-Grantor Trust?
There are several reasons someone might intentionally set up a non-grantor trust:
Asset Protection: Because the grantor gives up control, assets in a non-grantor trust may be better protected from creditors.
Charitable Planning: Non-grantor trusts are often used in charitable remainder trusts or other advanced giving strategies.
Estate Tax Minimization: Income and asset growth inside a non-grantor trust may be excluded from the grantor’s taxable estate.
In short, while a non-grantor trust can be a valuable part of a larger estate plan, it typically makes sense in more complex planning scenarios and should be carefully coordinated with your attorney and tax advisor – not necessarily with your favorite social media influencer.
Final Thoughts
Trusts—whether grantor or non-grantor—are powerful tools. But like all tools, their value depends on how and when they are used. The real power in estate planning lies not in the buzzwords or the viral videos, but in thoughtful, personalized strategies designed around your unique life and financial goals.
At Sequoia Advisor Group, we help clients navigate the complexities of estate planning with clarity, care, and a focus on the bigger financial picture. If you’re unsure how a trust fits into your plan—or whether your current trust structure still aligns with your goals—we’re here to help you make confident, informed decisions. Remember: the goal isn’t just to pass on wealth—it’s to pass it on wisely.
Looking Ahead: In our next installment, we’ll explore what happens to a trust after the grantor’s death—how assets are distributed, what responsibilities fall to the trustee, and how beneficiaries are impacted. We’ll also begin to unpack one of the most valuable (but often misunderstood) benefits of irrevocable trusts: asset protection. From shielding assets from creditors to preserving wealth for future generations, irrevocable trusts can play a critical role in long-term financial security.
If you’d like to talk to someone about your estate plan or learn more about trusts, don’t hesitate to contact us.