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 Pennsylvania, as in other states, the concept of a grantor trust is governed by both state law and federal tax law. A grantor trust is a type of trust where the grantor retains certain powers or interests in the trust, which results in the grantor being treated as the owner of the trust assets for income tax purposes. The rules that define a grantor trust are primarily found in the Internal Revenue Code (IRC) at 26 U.S.C. §§ 671-677. These sections detail the conditions under which the grantor is considered to retain control or benefit from the trust, such as the power to revoke the trust, to direct the trust's income, or to use the trust's assets for personal benefit. In Pennsylvania, the treatment of a grantor trust for state income tax purposes generally follows the federal treatment. If a trust is considered a grantor trust for federal income tax purposes, the income is typically taxed to the grantor on their personal income tax return, rather than to the trust itself. It's important for grantors to understand these rules when establishing a trust, as they have significant tax implications. An attorney with expertise in trust and estate law can provide guidance specific to Pennsylvania law and how it interacts with federal tax law regarding grantor trusts.