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 New Jersey, as in other states, a grantor trust is defined by the relationship between the grantor (the person who creates the trust) and the assets within the trust. If the grantor retains certain powers or benefits, such as the ability to revoke the trust or control over the trust's assets or income, the trust is considered a grantor trust for tax purposes. The key federal statutes governing grantor trusts are found in the Internal Revenue Code (IRC) at 26 U.S.C. §§ 671-677. These sections detail the specific powers and interests that, if retained by the grantor, will cause the trust's income to be taxable to the grantor. This includes the power to revoke the trust, to control beneficial enjoyment, or to deal with trust property for less than full and adequate consideration. New Jersey follows the federal treatment of grantor trusts for state income tax purposes, meaning that the income of a grantor trust is taxed to the grantor on both the federal and state level. It's important for grantors in New Jersey to understand these rules to ensure compliance with both state and federal tax laws.