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 Illinois, as in other states, a grantor trust is defined by the relationship between the grantor and the trust's assets or income. If the grantor retains certain powers or benefits, such as the ability to revoke the trust or control over the trust's income, the trust is considered a grantor trust for tax purposes. This means that the grantor is responsible for paying income taxes on the trust's income. The specific rules governing what constitutes a grantor trust are outlined in the Internal Revenue Code (IRC) at 26 U.S.C. §§ 671-677. These federal statutes apply nationwide, including in Illinois. The state does not have separate statutes that redefine grantor trust status for state income tax purposes; it follows the federal guidelines. Therefore, when an Illinois resident creates a revocable trust, or any other trust arrangement that meets the criteria set forth in the IRC, they must report and pay taxes on the trust's income on their personal tax returns.