Grantor vs. Non-Grantor Trusts. What are the Federal Tax Rules?

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The U.S. federal tax treatment of a trust will generally depend upon whether it is treated as a grantor trust or non-grantor trust.
A grantor trust is treated as if the grantor still retains control, use, and benefit of the assets, so the income and expense of the trust are reported directly on the grantor's federal tax return. The trust generally does not need to file its own Form 1041 tax return.
A non-grantor trust is treated as a separate taxpaying entity that files its own Form 1041.
The trust pays income taxes at the trust level unless distributions are made to the beneficiaries. In this case, the beneficiaries record their income and pay taxes.
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