Simplifying Irrevocable Grantor-Type Trusts in Pennsylvania

Date February 8, 2024
Authors Bryan Holm

“Owners”—not the trust—to pay income tax on trust income

According to new legislation signed into law by Governor Josh Shapiro on December 14, 2023, the income generated in an irrevocable grantor trust in Pennsylvania will no longer be taxed to the trust or its beneficiaries, but as personal income to any person treated as an owner of the trust, regardless of whether or not distributions are made. The related reporting and filing requirements are effective for tax years beginning in 2025.

In effect, the law transfers the responsibility of reporting and settling the tax away from a trust with a grantor-type structure and its beneficiaries to the grantor or any other individual treated as an owner under federal grantor trust rules.

Prior to this amendment to its income tax code, Pennsylvania was the only state that did not acknowledge an irrevocable grantor-type trust, even though it acknowledged revocable grantor trusts. That created a disparity in reporting requirements. At the federal level, the grantor or anyone treated as an owner of the trust reported all income associated with the trust whether or not it was distributed to them. But, at the state level, the trust was taxed on undistributed income; the beneficiaries, on income they received. The incongruity imposed administrative challenges and impeded efforts in estate planning.

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