medium · Asset-Backed Securities

In a 'Grantor Trust' structure commonly used for high-grade auto loans, what is a key tax implication for the investors?

1. The trust must retain a full 20% of all annual interest income as a dedicated tax reserve for future federal audits.
2. The trust itself is taxed directly as a corporation, and investors then receive residual dividends net of entity-level tax.
3. The trust structure can issue multiple sequential-pay classes of principal without ever jeopardizing its underlying tax-exempt status.
4. Investors are treated as if they directly own a pro-rata share of the underlying loans, and income is taxed at the investor level.

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