A non-grantor trust is a trust that is treated as a separate taxable entity for income tax purposes because the grantor has retained none of the powers or interests that would cause the trust's income to be taxed back to the grantor. Instead, the trust itself pays tax on undistributed income at compressed trust tax brackets, or beneficiaries pay tax on income distributed to them, depending on the trust's terms and distributions. Non-grantor trusts are often used for estate planning, asset protection, state income tax planning, and charitable strategies. When life insurance is owned by a non-grantor trust, such as certain irrevocable life insurance trusts (ILITs), the death benefit is typically excluded from the grantor's estate if properly structured, and ongoing trust income from side investments is taxed at the trust or beneficiary level rather than the grantor level.

In advisory practice, the term non-grantor trust arises when attorneys and CPAs design structures where the grantor intentionally avoids grantor-trust status to shift income or state tax burdens. Insurance-focused advisors may encounter non-grantor trusts that own life insurance for wealth transfer or business-succession purposes. Producers coordinate with legal and tax advisors to ensure that premium funding, Crummey notices, and policy ownership align with non-grantor trust objectives. Because non-grantor trusts face high marginal tax rates at relatively low income levels, planners pay close attention to investment choices and distribution policies. When reviewing existing policies, advisors confirm who is treated as the taxpayer and how trust income, including any policy-related investment income, is reported. Clear documentation of non-grantor trust status supports consistent tax reporting and effective estate planning outcomes.