# Grantor Trust: Definition and How It Works in California

> A grantor trust is a trust whose income the IRS taxes to the person who created it, the grantor, rather than to the trust itself.

Source: https://ridleylawoffices.com/estate-planning-glossary-california/grantor-trust/

By Eric Ridley, attorney, Ridley Law. Updated September 2026.

A **grantor trust** is a trust whose income the IRS taxes to the person who created it, the grantor, instead of to the trust itself, under federal tax law. Every revocable living trust is a grantor trust for as long as its settlor is alive, and some irrevocable trusts are deliberately drafted to keep that status too.

## How it works in California

Grantor trust status comes from federal tax law, not California trust law. Under 26 U.S.C. § 671, when a settlor keeps certain powers or interests over a trust, its income, deductions, and credits are reported on the settlor’s own tax return rather than on a separate trust return. These rules run from sections 671 through 679 of the Internal Revenue Code and go by the shorthand “grantor trust rules.”

A [revocable trust](https://ridleylawoffices.com/estate-planning-glossary-california/revocable-trust/) is automatically a grantor trust, because the settlor keeps the power to revoke it. Once a trust becomes irrevocable, whether at the settlor’s death or by its own terms, it typically stops being a grantor trust and starts filing its own tax return. Some irrevocable trusts, including many [irrevocable life insurance trusts](https://ridleylawoffices.com/estate-planning-glossary-california/irrevocable-life-insurance-trust/), are drafted on purpose to keep grantor trust status, usually so the settlor pays the income tax and lets trust assets grow without that tax drag.

## Why it matters

Grantor trust status decides who reports the trust’s income and who pays the tax on it. For example, a settlor sets up a revocable living trust that holds a rental property. The rental income is reported on the settlor’s personal return, not on a separate trust return, because the trust is a grantor trust while the settlor is alive.

## Common mistakes

Assuming grantor trust status is the same question as whether a trust avoids probate; the two issues are unrelated. Assuming every irrevocable trust automatically stops being a grantor trust; some are drafted to keep that status on purpose. Filing a separate tax return for a revocable living trust that should simply be reported on the settlor’s own return.

## Related terms

- [Revocable Trust](https://ridleylawoffices.com/estate-planning-glossary-california/revocable-trust/): always a grantor trust while the settlor is alive.
- [Irrevocable Life Insurance Trust (ILIT)](https://ridleylawoffices.com/estate-planning-glossary-california/irrevocable-life-insurance-trust/): often drafted to remain a grantor trust on purpose.
- [Settlor](https://ridleylawoffices.com/estate-planning-glossary-california/settlor/): the person whose tax return reports a grantor trust’s income.

Part of the [California estate planning glossary](https://ridleylawoffices.com/estate-planning-glossary-california/).