Grantor trust rules

Meaning of the term

The Internal Revenue Code describes grantor trust rules as provisions that treat a grantor as the owner of a trust portion when specified powers or interests apply. Sections 672 through 677 address the grantor's powers and benefits, while section 678 addresses when a person other than the grantor is treated as owner.^[4][6]

The rules operate portion by portion, so a provision about one part of a trust does not itself state that every part has the same treatment. Section 672 supplies shared definitions, including adverse and nonadverse parties, and rules for attributing a spouse's powers or interests to a grantor.^[1]

Powers that can trigger ownership treatment

Control over beneficial enjoyment is one trigger: section 674 treats the grantor as owner when disposition is available to the grantor or a nonadverse party without an adverse party's approval. That rule has exceptions for listed powers, including certain trustee powers and powers limited by a reasonably definite standard in the trust instrument.^[2]

Administrative powers form another category. Section 675 covers powers involving dealings for inadequate consideration, borrowing without adequate interest or security, unpaid borrowing, and specified administrative control exercised outside a fiduciary capacity.^[3]

A power to revest title in the grantor is addressed separately in section 676. The rule can apply even if another provision would not otherwise treat the grantor as owner, subject to a timing exception tied to a later event.^[4]

Section 677 concerns trust income available for the grantor or spouse. It covers income distributed to them, accumulated for later distribution, or used for premiums on life insurance, with an exception for certain charitable policies.^[5]

Limits and neighboring rules

The sections include conditions that limit these rules. For example, income that may be applied to support someone the grantor is legally obligated to support is not treated as taxable to the grantor merely for that reason, except to the extent it is actually applied or distributed for support.^[5]

Section 678 is a neighboring rule for a holder other than the grantor. It addresses a person's sole power to vest trust property or income in themselves, and certain retained control after a partial release or modification. It also provides exceptions, including when the grantor is otherwise treated as owner under another provision of the subpart.^[6]

Section 672(f) describes an additional limit: the subpart generally applies only when an amount is taken into account in computing income of a U.S. citizen or resident, or domestic corporation. It lists exceptions, including certain portions where the grantor can revest title alone or where distributions during the grantor's life go only to the grantor or spouse.^[1]

Questions and answers

Related terms

• Administrative powers (grantor trust): Section 675 of the Internal Revenue Code describes administrative powers that can cause a grantor to be treated as owner of a trust portion, with limits.
• Income for the benefit of the grantor: Section 677 treats a grantor as owner of a trust portion when income can benefit the grantor or spouse, including through certain life insurance premiums.
• Nonadverse party: The Internal Revenue Code defines a nonadverse party by reference to the term adverse party. Sections 672 through 678 use the distinction in trust rules.
• Power to control beneficial enjoyment: Section 674 describes when control over trust benefits causes a grantor to be treated as owner of a trust portion. The rule concerns beneficial enjoyment.

Related guides and articles

• Grantor trust rules in sections 671 to 679: A reference for U.S. citizen readers on grantor trust definitions, ownership tests, foreign trust beneficiaries, and statutory links to U.S. reporting rules.
• Grantor and nongrantor trust taxation: U.S. income tax rules distinguish grantor and nongrantor trusts for U.S. citizens. Sections 671 through 679 may assign ownership of all or part of a trust.
• Section 679 and U.S. Transfers to Foreign Trusts: Section 679 may treat a U.S. transferor as owner of the foreign trust portion tied to transferred property when a U.S. beneficiary may benefit from the trust.

Related pages

• Glossary: All terms.
• Related or subordinate party
• Administrative powers (grantor trust)
• Adverse party
• Beneficiary other than the grantor treated as owner
• IRS forms