Grantor Trust Rules 2026: Who Pays the Tax, Form 1041 Reporting

The rule in section 671: one sentence, three consequences

Section 671 (26 U.S.C. 671) does three things in one paragraph. It sends the trust’s items to the owner: “there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust.” It leaves the rest to the ordinary trust rules: “Any remaining portion of the trust shall be subject to subparts A through D.” And it closes the back door: “No items of a trust shall be included in computing the taxable income and credits of the grantor or of any other person solely on the grounds of his dominion and control over the trust under section 61 (relating to definition of gross income) or any other provision of this title, except as specified in this subpart.”

The third sentence is why reading the list matters. A trust is not a grantor trust because you feel in charge of it; it is one because a specific power or interest in sections 673 to 678 exists, or because section 679 applies. The IRS puts the result in plain words in the Instructions for Form 1041 (2025): “In general, a grantor trust is ignored for income tax purposes and all of the income, deductions, etc., are treated as belonging directly to the grantor.”

Our guides on revocable versus irrevocable trusts and on trust tax brackets cover the planning choice and the non-grantor rates. This page is the section-by-section reference for the whole subpart, from the definitions in 672 to the foreign-trust rule in 679, and the reporting rules that follow from it.

Sections 671 to 679, one by one

Source: 26 U.S.C. 671 to 679 (Legal Information Institute, Cornell Law School, text of the Code), read and saved on October 26, 2026. The last column is our reading.

One trap sits in the regulations. Treasury Regulation 1.673(a)-1, as printed by the Legal Information Institute, still describes a reversion that “will or may reasonably be expected to take effect in possession or enjoyment within 10 years.” The statute in force replaced that with the 5 percent test, and the Instructions for Form 1041 (2025) follow the statute: for transfers made in trust after March 1, 1986, the test is a reversionary interest whose value “is more than 5% of the value of that portion.” We follow the statute (our reading). A trust drafted before 1986 is a question for the attorney who has the instrument.

Who holds the power: sections 672 and 674

Whether a power triggers anything turns on who can use it and whether anyone with a stake must agree.

• Adverse party. Section 672(a): “any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust.” A nonadverse party is anyone else.
• Related or subordinate party. Under 672(c) this includes “the grantor’s spouse if living with the grantor” and the grantor’s parent, issue, brother, sister or employee. For sections 674 and 675 “a related or subordinate party shall be presumed to be subservient to the grantor,” unless shown otherwise “by a preponderance of the evidence.”
• Spouse. Section 672(e)(1): “a grantor shall be treated as holding any power or interest held by” an individual who was the spouse of the grantor at the time of creation, or who became the spouse afterward (for later periods only).
• The independent-trustee safe zone. Section 674(c) takes out a power to sprinkle income or pay out corpus if it is “solely exercisable” by trustees “none of whom is the grantor, and no more than half of whom are related or subordinate parties who are subservient to the wishes of the grantor.” A trust that names a bank as sole trustee with those powers often sits here (our reading).
• The standard exception. Section 674(b)(5)(A) excepts a power to distribute corpus to or for a beneficiary if “limited by a reasonably definite standard which is set forth in the trust instrument.” Section 674(b)(8) excepts “A power to allocate receipts and disbursements as between corpus and income, even though expressed in broad language.”

A power to add beneficiaries undoes several of these exceptions: 674(b)(5), (b)(6), (b)(7), (c) and (d) each say a power does not fall within them “if any person has a power to add to the beneficiary or beneficiaries,” except for after-born or after-adopted children.

Portions: the income and the corpus can have different owners

Section 671 speaks of “any portion of a trust,” and the Form 1041 instructions say so: “A trust may be part grantor trust and part ‘other’ type of trust, for example, simple or complex, or ESBT.” The regulation gives a case. In Example 1 of Reg. 1.671-4(b)(2)(iv), G creates an irrevocable trust paying ordinary income to G for life and the corpus to an unrelated person on G’s death. Under local law capital gains go to corpus. The regulation concludes: “Since G has a right to receive income, he is treated as an owner of a portion of the trust under section 677. The tax consequences of any items of capital gain of the trust are governed by the provisions of subparts A, B, C, and D.” And: “Because not all of the trust is treated as owned by the grantor or another person, the trustee may not report by the methods described in paragraph (b)(2) of this section.”

So the question to put to the documents is not just whether this is a grantor trust, but for which part and for which items. The first answer decides the owner’s Form 1040. The second decides whether the trust owes its own tax on gains it keeps.

Who pays: a $100,000 example (our arithmetic)

The assumptions are ours. A trust has $100,000 of net ordinary income in 2026 (rent and interest after expenses), no distributions, and the trust’s small exemption deduction is ignored. We leave out state tax, the 3.8% net investment income tax, the qualified business income deduction and trustee fees. The rates are the 2026 tables in Rev. Proc. 2025-32: Table 5 for the trust (“Over $16,000 $3,851 plus 37% of the excess over $16,000”) and Table 1 for married individuals filing jointly. The grantors in Cases B and C are joint filers, with other taxable income of $300,000 in B and $450,000 in C.

Three readings of the table (all our arithmetic):

• The trust bracket is the whole difference in A. A trust reaches 37% at $16,000 of taxable income. A married couple filing jointly does not reach 37% until $768,700, so on ordinary income the owner is almost always at or below the trust rate (Rev. Proc. 2025-32, Tables 1 and 5). In C the owner is above the 24% bracket and the gap closes to $1,804.50 ($34,931 minus $33,126.50).
• In B and C the trust keeps the full $100,000. The owner pays the tax from other money. Whether the trust can reimburse the owner, and what that does to the owner’s estate, is a drafting and estate tax question we take up in the intentionally defective trust guide, not an income tax one.
• D is not a grantor trust. It shows the other way out of the trust bracket, the distribution deduction. It needs a trustee who actually distributes, a beneficiary in a lower bracket, and a trust document that allows it; our trust tax brackets page works a longer example.

Rev. Proc. 2025-32 gives the 2026 tables for taxable years beginning in 2026. The 2027 tables were not published on October 26, 2026 (not verified).

How a grantor trust reports: Treasury Regulation 1.671-4

The regulation (26 CFR 1.671-4) starts with a default and then lets some trusts out of it.

The default, paragraph (a). Items attributable to a portion of a trust treated as owned by someone under subpart E “are not reported by the trust on Form 1041, ‘U.S. Income Tax Return for Estates and Trusts,’ but are shown on a separate statement to be attached to that form.” The Form 1041 instructions turn that into steps: “If the entire trust is a grantor trust, fill in only the entity information of Form 1041.” On the attachment, show the name, identifying number and address of each person to whom the income is taxable, the income “in the same detail as it would be reported on the grantor’s return had it been received directly by the grantor,” and any deductions, credits or elections that apply. “The fiduciary must give the grantor (owner) of the trust a copy of the attachment.”

The instructions’ own example shows what “same detail” means. A trust sold 100 shares of ABC for $1,010 with a basis of $10 and 200 shares of XYZ for $10 with a basis of $1,020. “The trust doesn’t report these transactions on Form 1041.” The attachment lists each sale separately, so the owner can enter them on Form 8949 and Schedule D, and “The trust doesn’t net the capital gains and losses.” Applied to a rental, the same rule means the owner receives the rent and expense detail, not a bottom-line figure (our reading).

The options, paragraph (b). For a trust all of which is treated as owned by one or more grantors, “the trustee may, but is not required to, report by one of the methods described in this paragraph (b).” Our EIN guide sets the three methods side by side; in short:

• One owner, name and TIN to payors (Optional Method 1). The trustee gives every payor the owner’s name and taxpayer identification number and the trust’s address, and “The trustee is not required to file any type of return with the Internal Revenue Service.” It needs “a complete Form W-9 or acceptable substitute Form W-9 signed under penalties of perjury” from the owner. Unless the owner is the trustee or a co-trustee, the trustee gives the owner a statement of the items each year.
• One owner, trust’s own number (Optional Method 2). The trustee gives payors the trust’s name, TIN and address and “must file with the Internal Revenue Service the appropriate Forms 1099,” showing the trust as payor and the owner as payee.
• Two or more owners (Optional Method 3). The trust’s own number to payors, Forms 1099 for the part each owner is treated as owning, and a statement to each. A husband and wife who file jointly count as one grantor for the single-owner methods (Reg. 1.671-4(b)(8)).

Who cannot use the options. Paragraph (b)(6) and (7) exclude a common trust fund, “A trust that has its situs or any of its assets located outside the United States,” a qualified subchapter S trust, a trust wholly owned by one grantor “whose taxable year is a fiscal year,” a trust with an owner “who is not a United States person,” and trusts where an owner is an exempt recipient for information reporting purposes (with one exception for several owners). Those trusts file Form 1041 with the attachment.

A real estate fund interest in the trust. The Forms 1099 the trustee files under Methods 2 and 3 leave out anything “reportable by the payor on an information return other than Form 1099.” The regulation’s own example: where a trust owns a partnership interest, “the trust’s distributive share of the income and gain of the partnership is not includible on any Forms 1099 filed by the trustee pursuant to this section because the distributive share is reportable by the partnership on Schedule K-1.” For a fund that issues a K-1 to the trust, the K-1 is addressed to the trust’s number and the owner gets the figures through the partnership and the trustee’s statement (our reading). Our K-1 versus 1099 guide covers what the fund sends.

Timing and penalties. The statement to the owner is due on “the date specified by section 6034A(a),” which is “on or before the date on which such return was required to be filed.” A calendar-year Form 1041 is due on the 15th day of the fourth month after year-end; for 2026 that is April 15, 2027, a Thursday (our arithmetic from the instructions’ rule). The trustee keeps a copy of the statement for “three years from the due date.” A trustee who fails to file a correct Form 1099 or to furnish a correct statement “is subject to the penalties provided by sections 6721 and 6722.” We did not retrieve the penalty amounts (not verified). The Instructions for Form 1041 for 2026 were not on the IRS page on October 26, 2026, which still showed the 2025 revision, so the 1099 due dates for 2026 reports are not verified; the 2025 text gives February 28, 2026 (March 31, 2026 if filed electronically).

Changing methods. A trustee who filed Form 1041 and moves to an optional method files a final Form 1041 for the year before, writing on the front: “Pursuant to § 1.671-4(g), this is the final Form 1041 for this grantor trust.” The trustee can go back to Form 1041 later (paragraph (g)(2)).

Grantor and non-grantor trust, side by side

Source: 26 U.S.C. 671, 1014 and 2038; 26 CFR 1.671-4 and 301.6109-1; Instructions for Form 1041 (2025); Rev. Proc. 2025-32; Rev. Rul. 2023-2. The comparison is our summary.

Death, inheritance and real estate

At the grantor’s death. The rules change on the day. A trust treated as owned by a decedent “may no longer report under this section,” and “must obtain a new TIN upon the death of the decedent, if the trust will continue after the death of the decedent” (Reg. 1.671-4(h)(2); Reg. 301.6109-1(a)(3)(i)(A)). The return for the year ending with the death “must indicate that it is a final return” for a trust that reported under paragraph (a). After that the trust is taxed under the non-grantor rules, or as part of the estate if the section 645 election is made (our reading); our trust tax brackets page covers that election.

Basis is a separate question. For a revocable trust, 26 U.S.C. 1014(b)(2) treats property transferred “in trust to pay the income for life to or on the order or direction of the decedent, with the right reserved to the decedent at all times before his death to revoke the trust” as acquired from the decedent, so the basis is “the fair market value of the property at the date of the decedent’s death” (1014(a)(1)). An irrevocable trust that is a grantor trust for income tax but is kept out of the estate is the other case. Rev. Rul. 2023-2 holds that “the basis of Asset immediately after A’s death is the same as the basis of Asset immediately prior to A’s death.” Our step-up guide and the intentionally defective trust guide work the dollar cost.

Your home inside a grantor trust. Treasury Regulation 1.121-1(c)(3)(i): if a residence is owned by a trust, for the period the taxpayer is treated under sections 671 through 679 as the owner of the trust or the portion that includes the residence, “the taxpayer will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the trust will be treated as if made by the taxpayer.” Whether a given trust is a grantor trust as to the house is a question for the document.

Where the other pages come in. Putting a deed into a revocable trust is the paperwork in our deed-into-a-living-trust guide. A GRAT and a sale to an intentionally defective trust use these rules on purpose: the estate-tax design is in the trust terms, and the income-tax rule on this page is what makes the grantor the taxpayer (our reading). Whether a trust document is a revocable or an irrevocable one is for the lawyer who drafts it; the choice depends on the facts of the family and the estate.

What a reader can do with this

• Find the trust’s own words. Look in the instrument for the powers in the table above: who can revoke, who can borrow, whether a swap power exists, whether income can go to you or your spouse, and who the trustees are.
• Ask which return reports it. The trustee knows whether the trust files Form 1041 with an attachment or uses an optional method; the answer decides whether you receive a statement or Forms 1099.
• Check the numbers on your own return. If the trust is yours for income tax, its rent, interest, dividends and gains belong on your Form 1040 in the detail the statement shows. If it is not, the trust or a beneficiary pays.
• Look at the rate gap. On ordinary income a trust that keeps it reaches 37% at $16,000 in 2026; the owner’s bracket may be lower.
• Note the date the rules change. The trust gets a new TIN at the grantor’s death if it continues.
• Do not guess the portion. A trust can be part grantor. The answer for each type of income is a matter for the trust’s CPA.

What to ask the trust’s CPA or attorney

1. Which sections of 671 to 679 make this trust a grantor trust, and for what portion: income, corpus or both?
2. Does the trustee file Form 1041 with an attachment, or report under an optional method, and why?
3. Who gets the statement of items, and when is it due?
4. If the trust owns a real estate fund, how does the K-1 reach my return?
5. What happens to the TIN, the return and the basis at my death?
6. Would turning off or on a specific power change who pays, and what else does it change?

This is analysis of public documents, not investment, legal or tax advice. Whether a trust is a grantor trust depends on its terms and the facts; the person who can say is the attorney who drafted it or a CPA with the instrument in hand.

FAQ

Sources, read and saved on October 26, 2026: 26 U.S.C. 671, 672, 673, 674, 675, 676, 677, 678, 679, 1014, 2038 and 6034A (Legal Information Institute, Cornell Law School, text of the United States Code); 26 CFR 1.671-4, 1.673(a)-1, 1.121-1 and 301.6109-1 (Legal Information Institute copy of the Code of Federal Regulations); Instructions for Form 1041 and Schedules A, B, G, J, and K-1 (2025) at irs.gov/instructions/i1041, the current revision on the IRS page that day; Rev. Proc. 2025-32 at irs.gov/pub/irs-drop/rp-25-32.pdf; Rev. Rul. 2023-2 at irs.gov/pub/irs-drop/rr-23-02.pdf. The $100,000 cases, the rate comparisons and the 2027 filing date are our arithmetic; readings marked “our reading” are ours. Not verified: the Instructions for Form 1041 for 2026, the 2027 trust and individual brackets, and the 6721 and 6722 penalty amounts. This page is information, not tax, legal or investment advice.