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 Arizona, as in other states, a grantor trust is defined by the relationship between the grantor and the trust's assets. If the grantor retains certain powers or benefits, such as the ability to revoke the trust or control over the trust's income, the trust is considered a grantor trust for tax purposes. The Internal Revenue Code (IRC) sections 671-677 detail the specific powers and controls that, if retained by the grantor, will classify the trust as a grantor trust. These include the power to revoke the trust, to control beneficial enjoyment, or to deal with trust property for less than full and adequate consideration, among others. When a trust qualifies as a grantor trust, the income generated by the trust's assets is taxable to the grantor, not to the trust itself or to the beneficiaries. This means that the grantor must report the trust's income on their personal tax return and is responsible for any taxes owed. It's important to note that while federal law provides the framework for grantor trust rules, state law can also affect trust administration and taxation. However, Arizona generally follows the federal treatment of grantor trusts for state income tax purposes.