As a result of a law signed by Governor Shapiro at the end of 2023, Pennsylvania has switched its rules regarding the tax treatment of income from a grantor trust. Accordingly, the state provision now lines up with the federal standard used by the IRS. Whether you have already established a grantor trust or are considering creating one as part of an overall asset management and distribution strategy, you should be aware of how this change affects Pennsylvania trust creators.
In a grantor trust, the person who created the trust retains significant control over the assets within it. For tax purposes, this means that the income, deductions and credits associated with the trust are attributed to the grantor rather than the trust itself. Previously, Pennsylvania allowed grantor trust income to be reported separately from the grantor’s personal income tax returns. However, recent changes now mandate that all income generated by a grantor trust must be reported directly on the grantor’s personal income tax return (Form PA-40).
Under federal law, grantor trusts have been treated as disregarded entities for tax purposes, meaning the trust’s income is taxed directly to the grantor. Pennsylvania’s updated approach now follows this same model, simplifying the tax process by removing the need for a separate trust return. However, this also means grantors need to be aware of the tax implications, as all income, whether earned directly or through the trust, is now taxable on their personal return.
For those who have established grantor trusts, this change may lead to a higher overall personal tax burden, especially if the trust generates substantial income. Income from the trust, including interest, dividends, rental income and capital gains, is now classified as personal income, potentially pushing grantors into higher tax brackets.
Additionally, Pennsylvania residents should ensure that they are accurately reporting all income related to their grantor trusts to avoid potential penalties or audits. The new rule may also prompt some individuals to review the structure of their trusts to determine whether they remain the most tax-efficient option for their estate planning needs.
The new reporting requirements highlight the importance of working with a knowledgeable trusts and estates attorney. At Abernethy & Hagerman, LLC in Allison Park, we can help you address how this change affects your overall estate planning goals and make any needed adjustments. To schedule a consultation, please call 412-486-6624 or contact us online. Area communities we serve include Gibsonia, Franklin Park, Bakerstown, West View, Hampton Township, McCandless Township, Wexford and Glenshaw.