A grantor trust is a trust whose income is taxable to the grantor (or another person) because the grantor retains certain powers or interests under 671-679. For income tax, the trust is disregarded, so transactions between the grantor and the trust are ignored. For transfer taxes, the trust remains a separate entity; assets may still be outside the grantor's estate if ownership and retained powers are properly structured. Grantor trusts are used to freeze estate values while the grantor pays the income tax, allowing assets to compound for beneficiaries.

Attorneys design ILITs and IDGTs with grantor-trust provisions so the grantor pays tax, allowing trust assets to grow undiminished. Advisors explain cash-flow impact and coordinate policy premiums and loans within the trust.