How a Non-Grantor Trust Works

One of the most useful estate planning tools is a trust, which can be used to create a legacy of wealth and protecting assets. One question to consider when creating one is what type of trust best suits your needs. Specifically, is a grantor or non grantor trust more appropriate? That distinction may seem simplistic but it matters from a tax perspective when shaping an estate plan.

Estate planning can be complicated so working with a financial planner can help you make arrangements for you and your beneficiaries.

What Is a Non Grantor Trust?

To understand non grantor trusts it’s helpful to have some background on how a grantor trust works. A grantor trust allows the grantor, i.e. the person creating the trust, to maintain certain decision-making powers. For example, that might include the power to:

Revoke the trust
Substitute assets in the trust
Borrow from the trust without providing collateral or security
Distribute trust income to oneself or to a spouse
Add or remove beneficiaries from the trust

Regardless of the scope of powers involved, what’s unique about grantor trusts is their tax treatment. With this type of arrangement, the trust grantor is responsible for paying income tax on the trust assets. Any income the trust generates or receives is taxable to the grantor, who reports it on their personal tax return.

A non grantor trust is any trust that is not a grantor trust. This kind of trust affords no control or powers to the grantor. That means they’re unable to revoke or change the terms of the trust or make changes to trust beneficiaries.

In terms of taxation, the lack of control means that a non grantor trust is treated as a separate tax entity. The trust itself is required to pay taxes on any income that’s received and file a tax return using a tax identification number.

Non Grantor Trust Advantages

A non-grantor trust can provide tax benefits by shifting income taxes from the grantor to the trust.

Creating a non grantor trust can offer certain tax benefits to the trust grantor. First, the grantor wouldn’t have to pay tax on the trust income. This might be an advantage in a situation where the grantor prefers to assume no further financial responsibility for the trust or its assets. For example, if you’re divorced and getting remarried, you may set up a non grantor trust for a former spouse or children from that marriage to avoid paying income tax on assets held in the trust.

There can also be positive tax implications if the trust beneficiaries are in a lower tax bracket than the grantor. When trust income is distributed to beneficiaries in a lower tax bracket, it may be taxed at a lower rate than it would if the grantor were being taxed.

You may consider creating a non grantor trust if you run a business. The qualified business Income (QBI) deduction allows eligible taxpayers to deduct up to 20% of qualified business income as well as 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This deduction is phased out once business owners reach certain income thresholds.

So where does a non grantor trust fit in? For tax purposes, non grantor trusts are treated as separate entities. If you own a business and your income is above the allowed threshold to qualify for the QBI deduction, you could establish one or more non grantor trusts as a work-around. Essentially, by dividing ownership of business assets and its associated income, it may be possible to qualify for the 20% deduction.

Non-grantor trusts can be useful for high-income taxpayers or individuals with significant property. The One Big Beautiful Bill Act (OBBBA) raised the state and local tax (SALT) deduction cap to $40,000 starting in 2025, with the benefit phasing out once income exceeds about $500,000. Because non-grantor trusts are treated as separate tax entities, planners sometimes consider using multiple trusts to spread income and potentially maximize deductions. However, whether a trust can claim the full $40,000 deduction depends on its own income and circumstances, and the rules may limit the benefit.

Non Grantor Trust Disadvantages

There are some potential drawbacks associated with non grantor trusts. First and foremost is the lack of control over trust assets. With a grantor trust, on the other hand, you’d still have certain powers you’d be able to exercise.

Next, its important to consider how any transactions between yourself as the grantor and the trust may be taxed. Generally, certain interactions, including the movement of assets or income between the two, is taxable since you and the trust are two separate entities. This difference may create tax liability on either side when conducting certain transactions.

Finally, you have to consider how much it costs to set up a non grantor trust. You’ll need to choose someone to act as the trustee, as grantors cannot be the trustee of a non grantor trust. This individual or entity is typically entitled to be paid a trustee fee for overseeing and administering the trust, which is drawn from trust assets.

Incomplete Non Grantor Trusts

An incomplete non-grantor (ING) trust can help reduce state income taxes by holding assets in a lower-tax state.

An incomplete non grantor (ING) trust is a type of trust that’s used for asset protection. This type of trust is often used by individuals who live in states with high income tax rates or no state income tax at all. For example, if you live in a state that has higher income tax rates you could establish an incomplete non grantor trust, then fund it using appreciated assets that have a low tax basis. If the trust is established in a state that has lower income tax rates or no state income tax, this could reduce the grantor’s tax bill when selling those assets later.

Incomplete non grantor trusts can also make it possible to transfer ownership of assets to the trust without paying gift tax. This would also convey the other tax benefits associated with non grantor trusts. Whether it makes sense to establish an incomplete non grantor trust can depend on the tax rules where you live. Talking to an estate planning attorney or tax professional can help you decide if it’s a suitable option for managing assets.

When to Use a Grantor vs. Non Grantor Trust

The choice between a grantor trust and a non grantor trust comes down to control and taxes. With a grantor trust, the person who creates the trust keeps power over the assets and asset allocation. You can change beneficiaries, reclaim property or dissolve the trust altogether. All income and gains flow back to your personal tax return, which keeps filing simple but also leaves you with the bill. This setup often works best if you want flexibility or if reducing taxable income is not a main goal.

A non grantor trust works differently. Once assets are placed in the trust, the grantor steps back. The trust becomes its own taxpayer with its own tax identification number. Income is reported on the trust’s return, not the grantor’s. That separation can lower overall tax costs if the trust’s beneficiaries are in lower tax brackets, or if you want to avoid paying taxes on income that you no longer control.

Situations often drive the decision. A grantor trust may suit someone who wants to pass wealth to family but still keep a say in how assets are managed. A non grantor trust may be better if you want to shift tax burdens, manage exposure to state and local taxes or set up a structure that stands apart from your personal finances. For business owners above the qualified business income thresholds, or high earners limited by the SALT cap, non grantor trusts can create room for tax benefits that would otherwise be out of reach.

Family and life circumstances matter as well. A parent may choose a non grantor trust to provide for children from a prior marriage without paying income tax on those assets year after year. A couple with shared goals may prefer a grantor trust so one spouse can continue to oversee how wealth is used. Each type solves different problems, and the right fit depends on what you value most—control, tax savings or protection.

Bottom Line

Non grantor trusts can be useful in a variety of situations from a tax and estate planning perspective. The most important thing to know about them is how they’re treated for tax purposes. Also, keep in mind that they don’t offer the same degree of control and decision-making as grantor trusts.

Tips for Estate Planning

Consider talking to a financial advisor about various tax planning strategies you may incorporate into your financial plan. 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.
Grantor and non grantor trust define how a trust is taxed. But there are other characteristics of trusts that are important to understand. For example, whether a trust is revocable or irrevocable matters for tax and estate planning. A revocable trust can be changed after the fact while an irrevocable trust cannot. It’s also helpful to understand different types of trusts that may be useful in estate planning. For example, a testamentary trust can be used to transfer assets in accordance with a last will and testament while a special needs trust may be established on behalf of a special needs dependent. An estate planning attorney can help with deciding which type of trust might fit your situation.