Income for the benefit of the grantor

Meaning in the grantor trust rules

Under 26 U.S.C. 677, income for a grantor's benefit is trust income that can go to the grantor or spouse, be held or accumulated for them, or pay certain life insurance premiums, and the grantor is then treated as owner of that trust portion.^[5]

The rule applies whether or not the grantor is treated as owner under the separate rule on control of beneficial enjoyment in section 674. It concerns a portion of a trust, so the ownership treatment stated in the section attaches to the portion meeting its conditions.^[5]

• Income distributed to the grantor or the grantor's spouse falls within the rule when no adverse party must approve or consent.^[5]
• The rule also covers income retained or accumulated for later distribution to either of them.^[5]
• Income used for premiums on life insurance for the grantor or spouse is included, except for policies irrevocably payable to a charitable purpose described in section 170(c).^[5]

Timing and support limits

Section 677 includes a timing exception for certain powers affecting income benefits only for a period that starts after a specified event. The grantor may be treated as owner after that event unless the power is relinquished.^[5]

A trust's possible use of income to support a beneficiary whom the grantor is legally obligated to support does not alone make that income taxable to the grantor under this rule or another chapter provision. The exception is limited to income not actually applied or distributed for that support, and amounts paid from corpus or income other than income for the taxable year receive separate treatment.^[5]

The neighboring rule in section 674 concerns powers that control who enjoys trust corpus or income without adverse-party approval. Section 677 instead focuses on whether income may benefit the grantor or spouse in the listed ways.^[2]

Other nearby provisions address different powers. Section 675 covers specified administrative powers, section 676 addresses a power to revest trust title in the grantor, and section 678 addresses when a person other than the grantor may be treated as owner.^[3][4][6]

In more detail

Section 672 defines a nonadverse party as anyone who is not an adverse party. It also treats a person with a general power of appointment over trust property as having a beneficial interest in the trust.^[1]

Under section 677(b), trust income is not taxable to the grantor merely because another person, the trustee, or the grantor acting as trustee or cotrustee has discretion to apply or distribute it for the support or maintenance of a beneficiary other than the grantor's spouse whom the grantor is legally obligated to support or maintain, except to the extent the income is actually so applied or distributed. When covered support amounts come from corpus or income other than income for the taxable year, the section treats them as amounts paid or credited under section 661(a)(2). Those amounts are taxed to the grantor under section 662.^[5]

Key points

Under section 672(e), a grantor is treated as holding any power or interest held by an individual who was the grantor's spouse when that power or interest was created, excluding an individual legally separated under a decree of divorce or separate maintenance at that time. A power or interest held by an individual who became the grantor's spouse after its creation is attributed to the grantor only for periods after that individual became the spouse.^[1]

Relevance for U.S. citizens

Ownership treatment of the grantor also affects the application of section 678 to another person's power over income. Section 678(b) says its subsection (a) does not apply to that power if the grantor is otherwise treated as owner under another provision of the subpart. This limitation covers the power as originally granted or subsequently modified.^[6]

Related reading

Grantor trust rules are the broader set of rules that can treat a grantor as owner of a trust portion, including when trust income may be used for the grantor's benefit. Power to control beneficial enjoyment covers the neighboring rule about powers over beneficial enjoyment. Power to revoke addresses a separate power to revest trust property in the grantor. Foreign grantor trust connects grantor ownership treatment to foreign trusts and U.S. reporting.

Questions and answers

Related terms

• Grantor trust rules: These federal tax code rules explain when a grantor is treated as owning part of a trust, based on the grantor's powers and interests and on income provisions.
• Power to revoke: Section 676 defines a power to revest trust property in the grantor. When the power applies, the grantor is treated as owner of the covered trust portion.
• 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.
• 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.

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.
• 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.
• 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.

Related pages

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