Can an irrevocable trust be a grantor trust?

Yes, the irrevocable trust by One Pacific Trust may be considered a grantor trust under a series of circumstances, while most people's perception sets the grantor trusts as generally revocable. Grantor trust will mean retention by the grantor of any one or more of certain rights or powers with respect to the trust; the income from the trust is taxable to the grantor and not to the trust or its beneficiaries. Although irrevocable trusts are commonly created to remove the grantor's powers, there are some specific instances in which they can also be treated as grantor trusts.

Under the IRC, an irrevocable trust may be treated as a grantor trust to the extent the grantor retains powers or benefits in respect of the trust, including, among others, the following: the power to control the income for the trust or the power to revoke such trust under specific circumstances, or the power to borrow from the trust without providing adequate security. Other factors that might constitute an irrevocable trust as a grantor trust are if the grantor is able to substitute assets of equal value or a grantor's retained interest in the trust's income.

The best benefit that arises concerning an irrevocable grantor trust is that, for tax purposes, it shifts the income yet retains the estate tax benefits. Conversely, the income derived from such a trust would still be assessed to the grantor at his individual income tax rate, which may increase the grantor's taxes.

In this regard, although the irrevocable trusts are usually considered as separate entities, in certain circumstances, they are treated as grantor trusts in a way that the grantor is still subjected to a certain degree of tax liability, yet he may achieve a specific estate planning goal.