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 North Carolina, as in other states, a grantor trust is defined by the relationship between the grantor and the trust's assets or income. 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 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 North Carolina. Under these rules, the income generated by the trust's assets is taxable to the grantor if the grantor retains certain interests or control over the trust. This includes revocable trusts, where the grantor maintains the power to revoke or alter the trust. It's important for grantors in North Carolina to understand these regulations, as they impact how trusts are taxed at the federal level. An attorney with expertise in trust and estate law can provide guidance specific to an individual's situation.