Grantor Trusts vs Non Grantor Trusts

If you are planning your estate in Atlanta, Georgia, you have probably heard the words “grantor trust” and “non-grantor trust” at some point. Maybe your financial advisor mentioned them. Maybe you came across them while researching ways to protect your assets. Either way, understanding the difference between these two trust types is one of the most important steps you can take before you sign any estate planning documents. At Slowik Estate Planning, located in Atlanta, Georgia, we work with families every day who want clear, honest answers about how trusts work and which one fits their situation. This page breaks down both trust types in plain language, so you can walk into your next conversation with confidence.

Table of Contents

• What Is a Grantor Trust?
• What Is a Non-Grantor Trust?
• Key Tax Differences Between Grantor and Non-Grantor Trusts
• How Georgia Law Shapes Your Trust Options
• Which Trust Type Is Right for You?
• FAQs About Grantor Trusts vs Non-Grantor Trusts in Atlanta, Georgia

What Is a Grantor Trust?

A grantor trust is a trust where the person who created it, called the grantor, still holds certain powers or benefits over the trust. The IRS uses the term “grantor trust” to describe any trust over which the grantor or other owner retains the power to control or direct the trust’s income or assets. Because of that retained control, the IRS treats the grantor as the owner of the trust for income tax purposes.

What does that mean in practice? It means all of the trust’s income, deductions, and credits flow directly to the grantor’s personal tax return. If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor. Think of it this way: the trust exists as a legal structure, but the IRS looks right past it and taxes you as if you still own everything directly.

The federal rules governing grantor trusts are found in Internal Revenue Code Sections 671 through 679. A grantor trust is a trust that is treated as wholly owned by a grantor under the rules of sections 671 through 679. Under IRC Section 671 specifically, where a grantor is treated as the owner of any portion of a trust, the taxable income and credits of the grantor include those items of income, deductions, and credits attributable to that portion of the trust.

Common examples of grantor trusts include revocable living trusts and certain irrevocable trusts where the grantor keeps specific powers. All revocable trusts are by definition grantor trusts. An irrevocable trust can be treated as a grantor trust if any of the grantor trust definitions contained in Internal Revenue Code Sections 671, 673, 674, 675, 676, or 677 are met. So even a trust labeled “irrevocable” can still be a grantor trust if the drafting attorney builds in the right provisions.

One big advantage of grantor trusts is that transactions between the grantor and the trust are not recognized for income tax purposes. You can move assets in and out without triggering a taxable gain. That flexibility makes grantor trusts popular tools for estate planning in Atlanta and across Georgia. If you want to understand how a grantor trust could work for your specific assets, reach out to an estate planning attorney in Atlanta at Slowik Estate Planning today.

What Is a Non-Grantor Trust?

A non-grantor trust is a different animal. Here, the grantor gives up enough control that the IRS treats the trust as a separate taxpaying entity. The trust itself files its own tax return, pays its own taxes on income it keeps, and operates independently from the person who created it.

A non-grantor trust pays income tax at the trust level on any taxable income retained by the trust. If the trust distributes income to beneficiaries, those distributions generally shift the tax burden to the individual recipients. If a trust makes a distribution to a beneficiary, such distribution will allocate the taxable ordinary income to the beneficiary, and will be taxed on the beneficiary’s personal income tax return. The trustee must complete Form 1041 and issue a Schedule K-1 to the beneficiary, showing the amount and type of income from the trust to be included on their individual tax return.

One thing people often miss about non-grantor trusts is how quickly they hit the top tax bracket. For 2025, a trust will pay income tax at the 37% tax rate when taxable income is more than $15,650. Compare that to an individual taxpayer, who does not reach the 37% bracket until income is much higher. That compressed bracket is a major reason why non-grantor trusts that accumulate income can be expensive from a tax standpoint.

That said, recent federal tax law changes have created new reasons to consider non-grantor trusts. Subject to income limitations for tax years 2025 through 2029, non-grantor trusts are eligible to deduct up to $40,000 of state and local income taxes (SALT) per taxpayer. This change, part of the One Big Beautiful Bill Act signed into law on July 4, 2025, means that each non-grantor trust can claim its own SALT deduction, separate from the grantor’s personal return. That is a significant planning opportunity for families in high-tax situations.

Under Georgia law, trusts are governed by the Revised Georgia Trust Code of 2010, found at O.C.G.A. Title 53, Chapter 12. Georgia recognizes a wide range of trust types, and the structure you choose will affect how the trust is taxed at both the state and federal level. Understanding these rules before you create a trust is critical. An Atlanta estate planning lawyer at Slowik Estate Planning can walk you through how Georgia’s trust laws apply to your specific goals.

Key Tax Differences Between Grantor and Non-Grantor Trusts

The tax treatment of these two trust types is where things get really important. Choosing the wrong structure can cost your family a significant amount of money over time. Let’s look at the main differences side by side.

With a grantor trust, all income is reported on the grantor’s personal Form 1040. The trust does not file a separate income tax return as a taxable entity. This means the grantor pays the tax on trust income out of their own pocket, which is actually a planning advantage. Paying taxes on trust income effectively transfers additional value out of the grantor’s taxable estate without triggering a gift tax. The trust grows tax-free from the grantor’s estate perspective, even though the grantor is paying the income taxes.

With a non-grantor trust, the trust files its own Form 1041. Many trusts and estates will be taxed in 2025 at 40.8% on ordinary income and 23.8% on qualified dividends and long-term capital gains, plus state income taxes. Those are steep rates. However, non-grantor trusts can make distributions to beneficiaries to shift taxable income to individuals who may be in lower brackets. Individual beneficiaries may be eligible for lower tax brackets. The net investment income tax does not affect single beneficiaries unless their adjusted gross income exceeds $200,000, or beneficiaries who are married filing jointly with adjusted gross income exceeding $250,000.

There is also an important difference when it comes to S corporation stock. A grantor trust is an eligible S corporation shareholder; however, other trusts will need to meet special requirements and must make a timely election as a qualified subchapter S trust or an electing small business trust to own S corporation stock. If you own S corporation interests and are planning to transfer them to a trust, this distinction matters a great deal.

One more critical difference involves the step-up in basis at death. Under IRS Revenue Ruling 2023-2, if a grantor funds an irrevocable trust with an asset and that asset is not included in the grantor’s gross estate at death, the asset does not receive a step-up in basis to fair market value at the grantor’s death. This means heirs may owe capital gains taxes on appreciation that occurred during the grantor’s lifetime. Proper trust administration and planning around this rule is essential for families with appreciated assets.

How Georgia Law Shapes Your Trust Options

Georgia has its own robust body of trust law that works alongside federal tax rules. The Revised Georgia Trust Code of 2010, codified at O.C.G.A. Title 53, Chapter 12, governs how trusts are created, administered, and terminated in this state. A trust is an entity created and governed under the state law in which it was formed. A trust involves the creation of a fiduciary relationship between a grantor, a trustee, and a beneficiary for a stated purpose.

Georgia law gives trust creators significant flexibility. Under O.C.G.A. § 53-12-23, a trust may be created for any lawful purpose. That broad language means Georgia residents can use trusts for a wide range of goals, from protecting assets for children to planning for pet guardianships and beyond.

Georgia’s Revised Trust Code also addresses how trustees manage trust assets and interact with beneficiaries. Under O.C.G.A. § 53-12-261, trustees in Georgia hold broad powers to administer trust assets in the best interest of beneficiaries. These powers include the ability to value assets and distribute them in cash or in kind. This matters when you are deciding whether a grantor or non-grantor structure better serves your long-term goals.

One Georgia-specific rule worth knowing: under O.C.G.A. § 53-12-62, when assets move from one trust to another (called a decanting), Georgia law specifically addresses what happens when both the original trust and the second trust qualify as grantor trusts for federal income tax purposes. When both the original trust and the second trust qualify as grantor trusts for federal income tax purposes and such original trust grants the settlor or another person the power to cause such original trust to cease to be a grantor trust, such second trust shall grant an equivalent power to the settlor or another person. This rule shows just how carefully Georgia has drafted its trust laws to interact with federal tax classifications.

Georgia also imposes its own income tax on trusts. Whether your trust is classified as a grantor or non-grantor trust will affect how Georgia taxes the trust’s income. Like individuals, trusts may be subject to income tax because they are residents of a state imposing income tax. States imposing income tax also establish specific rules to determine if a trust is a “resident” or “non-resident” of that state. Getting this right from the start can save your family real money over the life of the trust.

Which Trust Type Is Right for You?

So which trust is better for your situation? The honest answer is: it depends. There is no one-size-fits-all solution in estate planning. The right choice depends on your income, your assets, your goals for your family, and how much control you want to keep during your lifetime.

A grantor trust may be a better fit if you want to keep some control over the trust during your lifetime, if you want to pay the trust’s income taxes personally to reduce your taxable estate, or if you own S corporation stock that you want to transfer to a trust. Grantor trusts are also simpler to administer in many cases because the trust does not file a separate income tax return.

A non-grantor trust may be a better fit if you want to fully remove assets from your taxable estate, if you want to take advantage of the new $40,000 SALT deduction available to each non-grantor trust under current law through 2029, or if you want to shift income to trust beneficiaries who are in lower tax brackets. Non-grantor trusts also offer stronger asset protection in many cases because the grantor has genuinely relinquished control.

Keep in mind the step-up in basis issue. The federal estate tax exemption is $13.99 million for 2025, and beginning in 2026 will be permanently increased to $15 million per taxpayer because of additional relief granted in the One Big Beautiful Bill Act, which was signed into law on July 4, 2025. With a higher exemption, many families are less concerned about estate taxes and more focused on income tax planning. That shift in priorities may make the grantor trust structure more attractive for some families and the non-grantor structure more attractive for others.

The bottom line is that both trust types serve real and important purposes. The choice you make today will affect your family for generations. That is why working with a knowledgeable attorney at Slowik Estate Planning in Atlanta, Georgia is so important. We help you weigh all of these factors and build a plan that makes sense for your life. Contact us today to schedule a consultation and start building your estate plan with confidence.

FAQs About Grantor Trusts vs Non-Grantor Trusts in Atlanta, Georgia

What makes a trust a grantor trust under federal law?

A trust becomes a grantor trust when the person who created it retains certain powers or benefits over the trust assets. Under IRC Sections 671 through 679, the IRS looks at things like the power to revoke the trust, the power to control who receives income, and the power to direct investments. If the grantor holds any of these powers, the trust is treated as a grantor trust for income tax purposes. All revocable living trusts are automatically grantor trusts. Even some irrevocable trusts qualify as grantor trusts if the right provisions are included in the trust document.

Can a non-grantor trust save my family money on taxes in Georgia?

It can, depending on your situation. Non-grantor trusts are separate taxpaying entities, which means they can distribute income to beneficiaries who may be in lower tax brackets. Under current federal law, non-grantor trusts can also deduct up to $40,000 of state and local taxes per trust for tax years 2025 through 2029. If you set up multiple non-grantor trusts, each one can claim its own SALT deduction, which can add up to significant savings. Georgia also imposes its own income tax on trust income, so the classification of your trust matters at the state level too. An attorney at Slowik Estate Planning can help you run the numbers for your specific situation.

Does a grantor trust get a step-up in basis when the grantor dies?

Not always. Under IRS Revenue Ruling 2023-2, if you fund an irrevocable grantor trust with an asset and that asset is not included in your gross estate at death, the asset does not receive a step-up in basis to fair market value at your death. This means your heirs may owe capital gains taxes on appreciation that built up during your lifetime. The step-up in basis rule under IRC Section 1014 only applies to assets that are actually included in the decedent’s taxable estate. This is a critical planning point that every grantor trust creator in Georgia should understand before signing any trust documents.

How does Georgia law affect how my trust is taxed?

Georgia follows the Revised Georgia Trust Code of 2010, found at O.C.G.A. Title 53, Chapter 12. Georgia imposes its own state income tax on trust income, and the rules for determining whether a trust is a Georgia resident trust affect how that income is taxed at the state level. If your trust is classified as a grantor trust, the income flows to your personal Georgia tax return. If it is a non-grantor trust, the trust itself may owe Georgia income tax on income it retains. Georgia’s trust laws also give trustees broad powers to administer assets and interact with beneficiaries, which can affect how your trust operates from year to year. Working with an Atlanta estate planning attorney helps ensure your trust is set up correctly under both Georgia and federal law.

How do I know which type of trust is right for my estate plan?

The right trust type depends on several factors, including the size of your estate, the types of assets you own, your income tax situation, how much control you want to keep during your lifetime, and what you want to accomplish for your family. For example, if you own S corporation stock, a grantor trust is generally the simpler choice because grantor trusts are eligible S corporation shareholders without any special election. On the other hand, if your main goal is removing assets from your taxable estate and shifting income to beneficiaries in lower tax brackets, a non-grantor trust may serve you better. The best way to get a clear answer is to sit down with an attorney at Slowik Estate Planning in Atlanta, Georgia, who can review your full financial picture and help you choose the right structure for your goals. Every family’s situation is different, and prior results in similar situations do not guarantee the same outcome for your specific case.

More Resources About Trust Taxation Basics

• How Trusts Are Taxed
• Trust Tax Filings
• Capital Gains Inside Trusts
• Step Up in Basis and Trusts
• Georgia State Tax Considerations for Trusts