It's possible for transfers to a trust to be completed gifts for gift and estate tax purposes, even though that trust may still be treated as a grantor trust for income tax purposes, so that the income of the trust is taxable to the grantor even though retained in the trust or distributed to beneficiaries of the trust.

By paying taxes on trust income, the grantor in effect makes additional transfers to the trust beneficiaries without the payment of gift tax, since she is paying her own tax liability and not the trust's liability. Such a trust is often called an "Intentionally Defective Grantor Trust," because the grantor intentionally violates one or more of the grantor trust rules. (See below for a list of provisions that can be used to make the grantor liable for taxes on a trust's income without causing the trust's assets to be included in the grantor's estate.)

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