PA Updates to Tax Treatment of Grantor Trusts
Appel Yost LLP
Effective January 1, 2025, Pennsylvania has made a significant change in how it taxes grantor trusts — a move that brings long-awaited clarity and consistency for estate planners, trustees, and taxpayers alike.
For years, Pennsylvania treated irrevocable grantor trusts differently than the IRS. Federally, grantor trusts are disregarded entities, meaning the income is reported and taxed directly to the grantor. On the other hand, Pennsylvania treated grantor trusts as separate taxpayers, requiring the trust to file its own state income tax return and pay tax on its income, regardless of how the federal government treated it.
This disconnect often led to confusion and unintended tax consequences, such as:
- Double tax filings — one for the grantor and one for the trust.
- Mismatch of deductions and losses — Pennsylvania-deductible losses could not offset the grantor’s personal income.
- Unexpected taxable events — sales to a grantor trust were not taxable federally, but were taxable in Pennsylvania, often resulting in surprise tax liabilities.
Pennsylvania’s passage of S.B. 815, signed into law as Act 64 of 2023, brings state law into alignment with the federal grantor trust rules beginning with the 2025 tax year. Under the new law: i) income of a grantor trust will now be taxed to the grantor in Pennsylvania, just as it is under federal law; ii) the trust will no longer be required to file a separate Pennsylvania return if it qualifies as a grantor trust under federal guidelines; and iii) estimated payments by the trust may no longer be necessary, but grantors must ensure they account for the trust income on their own returns. This change brings Pennsylvania in line with the majority of other states and simplifies tax compliance for grantor trusts. While the shift is beneficial overall, it requires a careful review of current estate plans, trust structures, and tax projections to avoid surprises in 2025. Whether you are a trustee, grantor, or beneficiary, we can help you understand how this change affects you and ensure you are properly prepared for the 2025 transition.
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