In a recent post, I discussed the concept of a Grantor Trust. Now I will take a brief look into Nongrantor Trusts. Although neither of these are client-facing terms that you’re likely to use as an elder law attorney, it is important to have a grasp on these concepts and to be able to offer an explanation to your clients.

Like the Grantor Trust, the term Nongrantor Trust is a tax term. It has little to do with the trust itself or who receives income or assets, and everything to do with the tax liability of the trust. A Nongrantor Trust is a trust that is not taxed to the grantor (the person that creates and donates assets to the trust). Again, this is an income tax concept only — not a gift tax or estate tax concept. In this type of trust, the grantor is not treated as the owner of any portion of the trust.

Grantor Trusts can be a source of confusion for elder law attorneys and their clients alike. That’s because they are not a typical type of trust. The biggest difference to note about a Grantor Trust is that it is about how the trust’s income is taxed rather than who receives the income or assets of the trust.

In short, a Grantor Trust is a trust in which the grantor, or the originator of the trust, retains control over the trust. Therefore, the income is included in the income of the deemed owner (usually the grantor) rather than the trust or any other person. This distinction places Grantor Trusts into the "revocable" living trust category. The goal of establishing a Grantor Trust is to tax someone other than the recipient on the income that is generated by the trust.

"Per stirpes," "by representation," and "per capita at each generation" are all descriptors that tell the reader how to allocate a gift among a person's descendants. They are not shorthand for contingent beneficiary provisions. (While this discussion applies to all three, I will use per stirpes for the rest of this blog.)