Grantor Trust: Definition and How It Works in California

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 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, 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: always a grantor trust while the settlor is alive.
• Irrevocable Life Insurance Trust (ILIT): often drafted to remain a grantor trust on purpose.
• Settlor: the person whose tax return reports a grantor trust’s income.

Part of the California estate planning glossary.