Can the Grantor Be the Beneficiary in an Irrevocable Trust?

Many states offer distinct interpretations of trust law which can vary significantly between states. However, as of 2018, a total of 34 states have adopted the Uniform Trust Code established in 2000 by the National Conference of Commissioners on Uniform State Laws. A grantor forms a trust by transferring assets to the trust for a beneficiary. According to the Internal Revenue Service, a grantor may not be the irrevocable trust beneficiary. Combining the two roles may be an abuse of trust tax laws.

Trusts are automatically revocable unless the trust agreement specifically identifies it as irrevocable. Irrevocable trusts are created through the trust agreement or instrument. The grantor, or the owner, has the power to terminate a revocable trust. If it is irrevocable, the grantor agrees to relinquish control over it and its assets and agrees that he cannot, except for limited exceptions, cancel or alter it. Trusts are estate planning tools designed to avoid the probate taxes that come with wills. An irrevocable trust beneficiary enjoys the tax-free use of trust assets.

The IRS defines a grantor trust as a trust established to benefit the grantor or to give him control of the trust’s assets or income. The agency defines a beneficiary as one who is entitled to the trust's benefits. When a grantor retains power over a trust, the IRS requires the grantor to pay the taxes on income from the trust. Examples of power retained by a grantor include determining who receives income from the trust, voting or influencing voting on stocks or investment related to the trust and having the power to revoke it.

If the trust meets the IRS definition of a grantor trust, the agency considers the grantor to be the owner of the trust assets and does not view it as a separate tax entity. The IRS taxes all income from the trust to the grantor and not the trust, as is the practice with legally structured trusts. The agency applies the term tax evasion scheme to the establishment of a grantor trust and views this practice as an abuse of trust laws.

The conversion of a revocable trust to irrevocable removes the grantor and allows the beneficiary to assume control of his rights under the trust agreement and also assume the duties of the trustee. This change does not make the beneficiary the grantor. A revocable trust converts to an irrevocable trust if the grantor dies, provides a lifetime release of his power to revoke or is incapacitated and no representative acts on his behalf to forestall conversion.