What is a grantor trust?

A grantor trust is a type of trust where the grantor, or creator of the trust, retains certain powers or interests, leading to the trust’s income being taxed to the grantor rather than the trust itself. This arrangement allows the grantor to maintain control over the trust assets and enjoy potential tax benefits. Typically used in estate planning, grantor trusts can help streamline the transfer of assets upon the grantor's death, avoiding probate. Common examples include revocable living trusts, where the grantor can modify or revoke the trust during their lifetime.