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The key difference between a grantor trust and a non-grantor trust is the handling of taxes. In a grantor trust, the person who created the trust reports all trust income on their own tax return. In a non-grantor trust, however, the trust files its own return as a separate taxpayer. This can lead to higher tax rates. It also affects how much control the grantor maintains and how the trust fits into the broader estate plan.
A financial advisor can explain how different trust options affect your taxes 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.
One common form of a grantor trust is a revocable living trust, which the grantor can change or cancel during their lifetime. As a result, the IRS views the trust and the individual as the same taxpayer. Income from a revocable grantor trust is generally reported under the grantor’s taxpayer identification number and ultimately included on the grantor’s individual income tax return. In some cases, separate informational reporting is necessary.
Many people choose a grantor trust when they want to maintain some flexibility while addressing goals like avoiding probate, naming beneficiaries or managing assets if they become unable to do so. The structure effectively allows the trust to function as an extension of the grantor’s financial arrangements.
A grantor trust can also produce different income tax results than a non-grantor trust. This is due to the fact that income is taxed at the grantor’s individual rates. In 2026, individuals do not reach the 37% federal income tax bracket until taxable income exceeds $640,600 for single filers, or $768,700 for married couples filing jointly. Trusts, on the other hand, reach that rate at substantially lower taxable income.
What Is a Non-Grantor Trust?
A non-grantor trust, by contrast, is treated as a separate taxpayer for federal income tax purposes. A domestic non-grantor trust generally must file IRS Form 1041 to report its income, deductions, gains, losses and distributions to beneficiaries.
It’s possible to use non-grantor status with irrevocable trusts when the terms and retained powers cause the trust to be taxed separately from the person who created it. However, a trust’s income tax classification does not by itself determine whether its assets are excluded from the grantor’s taxable estate or protected from creditors. Those outcomes depend on the trust’s terms, applicable law and the rights retained by the grantor.
One consideration is that non-grantor trusts are taxed under compressed federal income tax brackets. In 2026, taxable income above $16,000 is subject to the 37% federal rate for estates and trusts. The lower brackets are 10% on taxable income up to $3,300, 24% from $3,300 to $11,700 and 35% from $11,700 to $16,000. 1
Still, the separation can be valuable for certain income, estate and asset planning goals. Whether a non-grantor trust provides estate tax or creditor protection benefits depends on its structure and applicable federal and state law.
Grantor Trust vs. Non-Grantor Trust: Tax Differences
The main difference between a grantor trust and a non-grantor trust comes down to taxation:
- In a grantor trust, all trust income is taxed to the grantor. This includes interest, dividends, capital gains and other earnings. The grantor is responsible for the income tax even when income remains in the trust or is distributed to beneficiaries.
- 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 may receive a Schedule K-1 and pay tax on their share instead.
Trusts face compressed tax brackets, reaching the 37% rate at taxable income above $16,000 in 2026. By comparison, the 37% bracket begins above $640,600 for single filers ($768,700 for married couples filing jointly). Distributing income from a non-grantor trust can shift some taxable income to beneficiaries. Ultimately, though, the tax result depends on the trust’s terms, distributable net income and the type of income involved.
Additionally, it’s important to note that capital gains are usually retained and taxed at the trust level. This is the case unless the trust document or state law allows for the inclusion of gains in distributable net income (DNI). For 2026, estates and trusts reach the 20% federal long-term capital gains rate when taxable income exceeds $16,250.
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. Some grantor trusts allow the grantor to retain substantial powers, as with a revocable living trust. Other grantor trusts are irrevocable and may restrict the grantor’s ability to change beneficiaries, reclaim assets or alter the trust. Grantor trust status for income tax purposes therefore does not necessarily mean the grantor has full control over the trust.
With the structure of non-grantor trusts, the grantor generally does not retain powers that would cause the trust’s income to be taxed to them. Many are irrevocable, but the extent to which their terms are changeable depends on the trust document and applicable state law. It is possible to modify some trusts through methods such as decanting, judicial modification or powers granted to a trust protector.
The amount of control retained can also affect estate tax and asset protection outcomes. Giving up certain rights may support those goals. However, simply classifying a trust as non-grantor does not automatically remove its assets from the grantor’s taxable estate or protect them from creditors.
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 control through a revocable trust.
- 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 want trust income taxed on your individual return rather than at separate trust tax rates.
You may choose to use a non-grantor trust if:
- You want the trust to be treated as a separate taxpayer.
- You’re using an irrevocable trust for estate, charitable or wealth transfer planning.
- The intent of the trust is to provide asset protection under applicable law.
- 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.
How Much More Could a Non-Grantor Trust Pay in Federal Income Tax?
The compressed tax brackets for non-grantor trusts can create a substantial difference when a trust retains income instead of distributing it. Consider a non-grantor trust with $50,000 of taxable ordinary income in 2026.
Using the federal trust brackets, you’d calculate its income tax as follows:
| Taxable Income | Calculation | Federal Tax |
|---|---|---|
| First $3,300 | $3,300 × 10% | $330 |
| $3,300 to $11,700 | $8,400 × 24% | $2,016 |
| $11,700 to $16,000 | $4,300 × 35% | $1,505 |
| Above $16,000 | $34,000 × 37% | $12,580 |
| Total | $16,431 |
In this scenario, there would be an effective federal income tax rate of about 32.9% on the trust’s $50,000 of taxable income. Note that is before considering deductions, credits, capital gains rates or the 3.8% net investment income tax. Certain trusts can also owe the net investment income tax on undistributed investment income once adjusted gross income exceeds the threshold tied to the top trust tax bracket.
The same $50,000 of income attributed to a grantor would instead become part of that person’s individual tax calculation. The resulting tax could be higher or lower. It will ultimately depend on the grantor’s other income, deductions, filing status and the character of the trust’s earnings.
Bottom Line
The choice between a grantor trust and a non-grantor trust affects who pays taxes and how your wealth is protected and ultimately passed on. Grantor trusts generally assign the income tax liability to the grantor, whereas non-grantor trusts are separate taxpayers that can pay tax on retained income or pass certain taxable income to beneficiaries. Of the two, non-grantor trusts reach the 37% federal income tax bracket much more quickly. But it’s also important to weigh factors like control, estate tax treatment and asset protection, which depend on trust terms and applicable law rather than grantor or non-grantor tax status alone.
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.
- While it may be tempting to save some money and plan your estate by yourself, you should still be careful with these DIY estate planning pitfalls.
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