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 Massachusetts, as in other states, the concept of a grantor trust is governed by both federal tax law and state law. Under the Internal Revenue Code (IRC) at 26 U.S.C. §§ 671-677, a grantor trust is defined by the degree of control or interest the grantor retains in the trust. If the grantor retains certain powers or benefits, such as the power to revoke the trust or the right to receive income, the trust's income may be taxable to the grantor. This is because the grantor is considered the owner of the trust for income tax purposes. A common example of a grantor trust is a revocable trust, which can be altered or terminated by the grantor at any time. Massachusetts follows the federal treatment of grantor trusts for state income tax purposes, meaning that the income of a grantor trust is taxed to the grantor on their personal tax return. It's important for grantors to understand these rules to ensure compliance with both federal and state tax obligations.