Ocean County Trust Attorney Christine Matus Explains Tax Benefits and Requirements of Grantor Trusts

TOMS RIVER, NJ - Estate planning strategies that allow individuals to maintain control of assets while transferring wealth require careful structuring under federal tax law. Ocean County trust attorney Christine Matus of The Matus Law Group (https://matuslaw.com/what-is-a-grantor-trust/) explains how grantor trusts provide tax-free wealth transfer to beneficiaries while the grantor remains responsible for income taxes on trust earnings.

According to Ocean County trust attorney Christine Matus, a grantor trust is one where the individual retains enough control or benefits that the IRS treats them as the owner for income tax purposes. All income the trust earns is reported on the individual's personal tax return, not on a separate trust return. The key feature is retained control-the individual may retain the power to revoke the trust, change beneficiaries, manage investments, or reclaim trust assets. Under the Internal Revenue Code, these powers make the individual the substantial owner of the trust.

"A grantor trust is one where individuals retain enough control that the IRS treats them as the owner for income tax purposes," explains Matus. "All trust income appears on personal tax returns, and in New Jersey, these trusts are governed by N.J. Revised Statutes Title 3B." Ocean County trust attorney Christine Matus emphasizes that the individual reports all trust income on their personal tax return as if they earned it directly. The trust itself does not pay income taxes. This includes interest, dividends, capital gains, and any other income the trust generates. For New Jersey residents, this means filing both federal and state tax returns that include the trust's income.

Different types of grantor trusts serve different estate planning goals. Revocable living trusts can be changed or canceled anytime during the individual's life and help avoid probate in the New Jersey Superior Court, Chancery Division, Probate Part. Irrevocable Life Insurance Trusts own life insurance policies and keep death benefits out of taxable estates. Grantor Retained Annuity Trusts transfer assets while the grantor receives annuity payments for a set period, allowing appreciation above the IRS assumed rate to pass to beneficiaries tax-free.

"The five main types of grantor trusts serve different purposes," notes Matus. "Revocable trusts for probate avoidance, ILITs for estate tax reduction, GRATs for wealth transfer, SLATs for using exemptions, and BDOTs for income tax planning."

Specific powers retained by the individual trigger grantor trust status under the Internal Revenue Code. Control and management powers include the ability to revoke the trust, change its terms, direct investments, or substitute assets with others of equal value. Beneficial powers exist when the individual can receive trust income without restriction or when trust income can be used to pay life insurance premiums. Distribution and beneficiary powers, such as controlling when and how much beneficiaries receive or the ability to change who the beneficiaries are, also create grantor trust status.

Grantor trusts provide significant benefits, including tax-free wealth transfer to beneficiaries and Medicaid planning opportunities. The individual's payment of income taxes on trust assets effectively makes tax-free gifts to beneficiaries each year, and the trust grows without being reduced by tax payments. Because most people pay lower tax rates than trusts, which reach the top federal rate at just over $15,650 of income, money is saved overall.

Attorney Matus points out that grantor trusts help with Medicaid planning by moving assets out of the individual's name while they remain responsible for taxes. New Jersey has a five-year lookback period for Medicaid, so transferring assets to an irrevocable grantor trust five years before needing long-term care can protect those assets while the individual qualifies for benefits.

"Grantor trusts require individuals to pay taxes on income they may not receive, face potential legislative changes, demand careful tax reporting, and limit flexibility by restricting access to transferred assets," adds Matus.

Individuals must pay income taxes on all trust earnings, even if they do not receive any distributions from the trust. If the trust sells an asset with a large capital gain, the full tax on that gain is owed. This can create cash flow problems if funds outside the trust are not available to cover the tax bill. Proposed federal legislation could change how grantor trusts are taxed, potentially requiring trust assets to be included in taxable estates at death.

A grantor trust makes sense for individuals who want to preserve wealth for beneficiaries while managing tax liability strategically. This strategy works best for people who can afford to pay income taxes on trust earnings from their other assets. New Jersey residents with valuable real estate, family businesses, or substantial investment portfolios often benefit from using grantor trusts to preserve wealth, reduce administrative burden, and support long-term planning goals.

Setting up a grantor trust requires drafting a trust document that specifies the trust's terms, names the trustee and beneficiaries, and includes provisions that create grantor trust status. Assets are then transferred into the trust by changing the title from the individual's name to the trust's name. For real estate, this means recording a new deed with the Ocean County Clerk's office.

About The Matus Law Group:

The Matus Law Group is a Toms River-based law firm focused on trust and estate planning throughout Ocean County and New Jersey. Led by attorney Christine Matus, the firm helps families establish grantor trusts and other estate planning tools to preserve wealth and protect beneficiaries. For consultations, call (732) 281-0060.

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