A grantor trust is a trust in which the grantor or settlor (the person creating the trust) retains control over the assets placed in the trust—or the income from the assets placed in the trust—to such an extent that the grantor or settlor is taxed on the trust’s income. For example, a revocable trust (a trust that may be revoked) is a grantor trust.

The controls retained by a grantor or settlor that may result in tax liability for the grantor or settlor are set out in the Internal Revenue Code (IRC), in the United State Code (federal statutes) at 26 U.S.C. §§ 671-677.

In Hawaii, as in other states, a grantor trust is defined by the relationship between the grantor and the trust assets. If the grantor retains certain powers or interests in the trust, such as the power to revoke the trust or to direct the income, the trust is considered a grantor trust for tax purposes. This means that the grantor is treated as the owner of the trust assets and is taxed on the trust's income, as outlined in the Internal Revenue Code (IRC) at 26 U.S.C. §§ 671-677. These sections detail the specific powers and interests that, if retained by the grantor, will cause the trust to be treated as a grantor trust. It's important to note that while federal law determines the tax treatment of grantor trusts, Hawaii state law will govern the creation and operation of the trust itself. An attorney can provide guidance on how to structure a trust to meet the grantor's goals while considering the tax implications under both federal and Hawaii state law.