Non-grantor trusts must have their own taxpayer ID, generally have to file returns and can take deductions for income distributions to beneficiaries (in which case the beneficiary and not the trust is taxed on that income). “There are many [tax-planning] advantages of having the grantor pay the tax for the beneficiaries,” Mendlowitz said. “A disadvantage is where the grantor no longer wishes to make those tax payments or where there’s a very large one-time gain on disposition of trust assets and the grantor’s tax is excessive.”
There could also be an income tax benefit to the non-grantor trust for qualified business income deduction where the grantor’s income is too high for this pass-through deduction. “There could also be an income tax benefit for children,” Mendlowitz said, “when the trust or grantor would be subject to the net investment income tax and the beneficiaries would not be.”