A taxpayer is the grantor of a trust. The trust generates $10,000 of income. The trustee retains the income in the trust. Who pays the tax?

Answer options:

The trust.

The taxpayer (grantor).

The beneficiaries.

No one until distributed.

How to approach this question

Identify 'Grantor Trust'. Rule: Grantor pays ALL tax, as if the trust didn't exist.

Full Answer

B.The taxpayer (grantor).✓ Correct

The taxpayer (grantor).

IRC §671. Where the grantor is treated as the owner of any portion of a trust (due to retained powers), the income, deductions, and credits attributable to that portion are included in the grantor's taxable income.

Common mistakes

Thinking the trust pays tax on retained income (true for complex trusts, not grantor trusts).

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