There are two categories of trusts: grantor (ie, revocable) and irrevocable. In a grantor trust, the grantorA person or other entity that transfers ownership of property to a trustee who holds the property in trust for the trust's beneficiaries. retains control over (ie, retains interests in) the assets transferred to the trust. Retained interests include the grantor's right to make changes or even terminate the trust up to the date of the grantor's death. In this scenario, since Pat (the grantor) retains certain interests in the trust assets, the trust is a grantor trust (ie, revocable trust).

Grantor trusts are not taxed as separate entities by the IRS because the trust assets are considered to be still owned by the grantor. The trust income is taxable to the grantor as long as the grantor retains an interest in the trust assets.

In contrast, an irrevocable trustA type of trust in which the grantor has no control or claim over the property transferred to a trust after the transfer. Only beneficiaries may modify or terminate the trust. treats the transfer of assets to the trust as permanent, and the grantor has no control over or claim to the assets transferred. IRS rules classify irrevocable trusts as either simpleAn IRC definition for a trust that (1) makes annual beneficiary distributions that are equal to distributable net income (although they can be more), (2) does not make any charitable distributions, and (3) does not distribute any corpus (ie, principal). or complexAn IRC definition for a trust that is not a simple trust. It can (1) make annual beneficiary distributions that are less than distributable net income, (2) make charitable distributions, and (3) distribute corpus (ie, principal). (Choices A and C). Irrevocable trusts are taxed as separate entities that report income on Form 1041.

(Choice D) A preneed funeral agreement is not a type of trust.

Things to remember:
In a grantor trust (ie, revocable trust), the grantor retains control over and claim to the assets transferred. The grantor may make changes to or even terminate the trust. The trust income is taxable to the grantor as long as the grantor retains an interest in the trust assets.