Grantor Trusts and Act 64: Pennsylvania Tax Changes for 2025

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For tax years beginning on or after January 1, 2025, Act 64 of 2023 changed the way Pennsylvania treats income from grantor trusts. The short version: Pennsylvania now follows the federal approach. Trust income that the IRS attributes to the grantor under IRC §§ 671 through 679 is now taxable to the grantor for Pennsylvania personal income tax purposes as well.

This is a significant shift. Before Act 64, Pennsylvania taxed grantor trust income at the trust level, creating a disconnect between the federal return (which reported income on the grantor's 1040) and the state return (which reported it on the PA-41 fiduciary return). That disconnect caused confusion, double-reporting headaches, and situations where income fell through the cracks in one direction or the other.

What Changed

Under the new rules, personal income received by a resident trust (and certain classes of income received by a nonresident trust from Pennsylvania sources) is taxable to the grantor or other person to the extent that person is treated as the owner of the trust under the specified IRC sections. This applies whether or not the income is actually distributed to the beneficiaries or accumulated within the trust.

In practical terms: if you created a grantor trust and the IRS treats you as the owner for federal tax purposes, Pennsylvania now agrees. You report and pay PA income tax on that trust income on your own PA-40 return, not the PA-41.

Filing Methods

According to the PA Department of Revenue, grantor trusts should file using the same method they use for federal purposes. There are three options:

Default Method

If the entire trust is a grantor trust, the trustee fills in only the entity information on the PA-41 (PA Fiduciary Income Tax Return). No dollar amounts go on the form itself. Instead, the income details go on an attachment, and the trustee gives the grantor a copy. The attachment must show the name, identifying number, and address of the person to whom the income is taxable, along with a detailed breakdown of income, deductions, and credits in the same form they would appear on the grantor's individual return.

If only part of the trust is a grantor trust, the non-grantor portion gets reported on the PA-41 under normal rules. The grantor portion goes on the attachment only. Do not use PA-41 Schedule RK-1 or NRK-1 as the attachment for the grantor portion, though RK-1 or NRK-1 is still used for distributions from the non-grantor portion.

Optional Method 1

For a trust treated as owned by one grantor (or one other person), the trustee provides all payers of income with the grantor's name and TIN and the trust's address. This method requires a signed Form W-9 from the grantor. The trustee must give the grantor a statement showing all items of income, deduction, and credit, identifying each payer and explaining how the grantor accounts for those items.

Optional Method 2

Similar to Optional Method 1, but the trustee gives payers the trust's own name, address, and TIN, then files the appropriate 1099 forms showing the trust as payer and the grantor as payee. The trustee must still provide the grantor with a statement covering all income, deductions, and credits.

What This Means for Planning

The alignment simplifies compliance, but it also has planning implications worth thinking through:

Existing grantor trusts. If you have an irrevocable grantor trust that was set up before 2025, the tax reporting obligation has shifted. You (the grantor) are now responsible for reporting and paying PA income tax on the trust's income on your individual return. Your tax preparer needs to know about this change, and your trustee needs to provide you with the right documentation.

IDGTs and installment sales. For intentionally defective grantor trusts used in conjunction with installment sales to shift appreciation out of your estate, the state tax treatment now matches the federal. The grantor pays income tax on the trust's earnings, which effectively serves as a tax-free gift to the trust's beneficiaries (since those tax payments are not treated as additional gifts). That benefit, which was already available federally, is now recognized at the state level too.

Revocable living trusts. Most revocable living trusts are grantor trusts by definition, so in practice many families won't notice a difference. The income was already being reported on the grantor's return for federal purposes, and now the state follows suit.

Non-grantor trusts are not affected. Trusts that are not grantor trusts under IRC §§ 671 through 679 continue to file and pay tax at the trust level. The compressed federal income tax brackets for trusts (reaching the highest bracket at just $15,650 in 2025) still apply, making the grantor vs. non-grantor distinction a meaningful planning consideration.

Action Items

If you are the grantor of an irrevocable trust, or if you serve as trustee of one, there are a few things to address for the 2025 tax year and beyond:

Confirm with your tax preparer that the trust's PA filing method has been updated. Make sure the trustee is providing the required documentation (the attachment or the statement, depending on the method used). And if the trust is partially grantor and partially non-grantor, verify that the allocation between the two is correct, because getting that split wrong creates problems on both the PA-41 and the PA-40.

If you have questions about how Act 64 affects a specific trust or whether your existing estate plan needs adjustments, call 215-949-0888 for a consultation.