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 Virginia, 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 income from the trust's assets, the trust is considered a grantor trust for tax purposes. This means that the income generated by the trust is taxable to the grantor rather than to the trust itself. The specific rules governing what constitutes a grantor trust are detailed in the Internal Revenue Code (IRC) at 26 U.S.C. §§ 671-677. These federal statutes outline the various controls and interests a grantor might retain that would lead to the grantor being taxed on the trust's income. It's important to note that while state law may govern the creation and administration of trusts, federal law primarily determines the tax treatment of grantor trusts.