If you are a trustee, beneficiary, or grantor of an irrevocable grantor trust, Pennsylvania’s new tax law may impact you. NOTE: PA never honored grantor trusts – until now.
Governor Josh Shapiro signed Senate Bill 815 (S.B. 815) into law on December 14, 2023. As a result, effective January 1, 2025, Pennsylvania’s taxation of irrevocable grantor trusts now aligns with the federal rules.
For tax years beginning in 2025, income from a resident or nonresident grantor trust will be taxed directly to the grantor, rather than the trust, if the grantor is treated as the owner under federal tax law.
Note: Most irrevocable trusts are NOT grantor trusts but it’s important to understand these new rules if you are a trustee, beneficiary or grantor.
Key Changes Under the New Rules:
- Pennsylvania will no longer tax grantor trusts as separate entities. Income from these trusts will now be taxed to the grantor, regardless of whether it is distributed.
- Trust assets will no longer be reduced by tax payments, allowing them to grow tax-free for beneficiaries.
- Transactions between a grantor and their grantor trust will no longer trigger state tax recognition, e.g. a sale of a business interest in exchange for a promissory note.
We have written an article that goes into much more detail that you can read by clicking here.
These changes may present new planning opportunities and create new filing requirements and tax liabilities. We recommend that you discuss them with your legal, financial planning, and accounting team.
