Definition
The term non-grantor trust is used to describe an arrangement where the donor of the assets gives up all control. In a non-grantor trust, the donor is not a beneficiary or a trustee.
Explanation
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 gives up all control over both the assets in the trust and the income derived from those assets, it is classified as a non-grantor trust. With this type of trust, the donor gives up their right to revoke, amend, or terminate the trust.
The difference between grantor and non-grantor trusts is important from an income tax standpoint. A trust established as a non-grantor trust is a taxable entity, which means a separate income tax return needs to be filed on behalf of the trust. The assets placed in the trust by the grantor are owned by the trust. This means the trust is responsible for income derived from the assets. If income from the trust is distributed to a beneficiary, the trust must issue a Schedule K-1 to that individual so the income can be reported on their tax return.
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