In a recent post I discussed the concept of a Grantor Trust. Now I will take a brief look into Nongrantor Trusts. Although neither of these are client-facing terms that you’re likely to use as an elder law attorney, it is important to have a grasp on these concepts and to be able to offer an explanation to your clients.
Like the Grantor Trust, the term Nongrantor Trust is a tax term. It has little to do with the trust itself or who receives income or assets, and everything to do with the tax liability of the trust. A Nongrantor Trust is a trust that is not taxed to the grantor (the person that creates and donates assets to the trust). Again, this is an income tax concept only — not a gift tax or estate tax concept. In this type of trust, the grantor is not treated as the owner of any portion of the trust.
The term Nongrantor Trust, therefore, is essentially used to describe a trust in which the donor of the assets gives up control, including their right to amend, revoke or terminate the trust. In this type of trust, the donor is not a beneficiary or a trustee.
Any trust that is established as a Nongrantor trust is a taxable entity. The assets the grantor puts in the trust are then owned by the trust, and therefore the trust assumes responsibility for any income derived from those assets.
Because it is an income tax concept, a Nongrantor Trust includes both ordinary income and capital gains. As is the case with the Grantor Trust, Nongrantor Trust status could apply to one type of income but not the other — it’s not an all-or-nothing proposition.
It’s important to understand that Nongrantor Trust status can be triggered if any single portion of the trust triggers its rules.
It only takes one provision to cause grantor trust status, but it takes all of them to avoid it,"
For more information on the rules and implications of Nongrantor Trusts, watch this recorded course on the topic, where I go more in depth on the subject.