Grantor vs. Non-Grantor Trust: Key Differences

The key difference between a grantor trust and a non-grantor trust is how taxes are handled. In a grantor trust, the person who created the trust reports all trust income on their own tax return. In a non-grantor trust, the trust files its own return as a separate taxpayer, which can lead to higher tax rates. This tax treatment also affects how much control the grantor keeps and how the trust fits into broader estate planning.

A financial advisor can explain how different trust options affect your taxes, control and long-term plans based on your situation.

What Is a Grantor Trust?

A grantor trust is a trust in which the person who creates it keeps certain powers or control. Because of this, the IRS treats all trust income as belonging to the grantor, and the grantor pays the income taxes tied to the trust’s assets.

A revocable living trust is a common form of grantor trust. The grantor can change or cancel it during their lifetime, and the IRS views the trust and the individual as the same taxpayer. As a result, the trust does not file its own tax return, and all income is reported on the grantor’s Form 1040.

Many people choose a grantor trust when they want to keep flexibility while addressing goals like avoiding probate, naming beneficiaries or managing assets if they become unable to do so. The structure allows the trust to function as an extension of the grantor’s financial arrangements.

For higher-income taxpayers, a grantor trust may lead to lower overall taxes because individual tax brackets cover more income than trust brackets. At the same time, the grantor takes on the tax responsibility for income that stays in the trust, which requires planning.

What Is a Non-Grantor Trust?

A non-grantor trust, by contrast, is an independent legal and tax entity. Once a person has placed assets into a non-grantor trust, the trust, not the individual, becomes the taxpayer. It must file its own income tax return annually using IRS Form 1041.

This distinction gives the trust full independence from the grantor, making it a useful tool for irrevocable transfers. Because the grantor gives up control and tax responsibility, people often use non-grantor trusts in advanced planning situations, such as minimizing estate taxes, charitable giving or shielding assets from creditors.

One tradeoff is that non-grantor trusts are taxed at highly compressed rates. In 2025, a trust hits the top federal income tax bracket of 37% with income over $15,650. That makes non-grantor less efficient from an income tax standpoint (unless the trust is structured to distribute income to beneficiaries, who then pay at their own, often lower, rates).

Still, the separation can be valuable for liability protection, privacy and meeting specific estate goals. Many high-net-worth individuals use non-grantor trusts as part of a broader wealth transfer strategy.

Grantor Trust vs. Non-Grantor Trust: Tax Differences

A grantor trust taxes all income to the grantor, while a non-grantor trust is taxed as its own entity or passes taxes to beneficiaries through distributions.

The main difference between a grantor trust and a non-grantor trust is how each structure is taxed, and that choice can influence your broader estate and income planning. Here is the core distinction:

In a grantor trust, all trust income is taxed to the grantor. This includes interest, dividends, capital gains and other earnings. The trust doesn’t file its own return (unless required for informational purposes), and beneficiaries don’t pay taxes on distributions.
In a non-grantor trust, the trust files Form 1041 and pays tax on any income it retains. If the trust distributes income to beneficiaries, they receive a Schedule K-1 and pay tax on their share instead.

Trusts face compressed tax brackets, reaching the top federal rate with minimal income. By contrast, individuals must earn $626,350 as of 2025 ($751,600 or more for joint filers) to hit the same bracket. That’s why non-grantor trusts often distribute income to beneficiaries to lower the tax burden.

Additionally, it’s important to note that capital gains are usually retained and taxed at the trust level, unless the trust document or state law allows for the inclusion of gains in distributable net income (DNI).

Because of these notable taxation differences, it’s important to weigh the pros and cons of each setup depending on your goals, whether that’s minimizing income tax now or maximizing long-term estate preservation later.

Control and Flexibility Considerations

Beyond taxes, the choice between a grantor and non-grantor trust often depends on how much control you want to keep. A grantor trust allows the grantor to retain rights such as changing the trust terms, adjusting beneficiaries or moving assets. This structure appeals to those who want to keep decision-making authority during their lifetime.

Non-grantor trusts, in contrast, are typically irrevocable. Once established, the terms and beneficiaries are locked in, and the grantor relinquishes control. This lack of control is what allows for asset protection and potential estate tax savings. Modifying a non-grantor trust usually requires court approval or legal restructuring through mechanisms like decanting or trust protector provisions.

For those with evolving needs or family dynamics, grantor trusts may offer more peace of mind. But when it comes to prioritizing asset protection or tax mitigation, non-grantor structures may make more sense.

When to Use a Grantor Trust vs. Non-Grantor Trust

Choosing between a grantor and a non-grantor trust depends on your goals and the role you want the trust to play in your plan.

You may choose to use a grantor trust if:

You want to avoid probate and retain full control over assets.
You’re creating a revocable living trust to manage your estate.
You’re planning for incapacity or want seamless asset management during your lifetime.
You’re not concerned about estate tax exposure or are early in your planning process.

You may choose to use a non-grantor trust if:

You want to remove assets from your taxable estate.
You’re engaging in advanced planning (e.g., GRATs, SLATs, charitable trusts).
You want to protect assets from creditors or lawsuits.
You’re trying to create tax separation between your personal income and trust earnings.

Other considerations when deciding between the two include state tax laws, beneficiary ages, charitable intent and income distribution preferences. An estate attorney and financial advisor can help you weigh the benefits of each trust type in the context of your full financial plan.

Bottom Line

State taxes, beneficiary needs and your goals also influence which trust structure works best.

The choice between a grantor trust and a non-grantor trust affects who pays taxes and how your wealth is protected and passed on. Grantor trusts give you more control and straightforward tax reporting, while non-grantor trusts create separation from your estate and can support certain tax planning goals. The right option depends on your financial, tax and legacy priorities.

Estate Planning Tips

If you want to set up a trust, a financial advisor can help you compare how different types of trusts can affect your taxes, control over assets and long-term goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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