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 Colorado, 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. This means the income generated by the trust's assets is taxable to the grantor rather than to the trust itself. The specific rules governing what constitutes a grantor trust are outlined in the Internal Revenue Code (IRC) at 26 U.S.C. §§ 671-677. These federal statutes apply nationwide, including in Colorado. The state does not have separate statutes that redefine these federal provisions, so the federal law directly informs how grantor trusts are treated for income tax purposes in Colorado. It is important for grantors to understand these rules to ensure compliance with tax obligations and to make informed decisions about trust creation and administration.