Related or subordinate party

Definition and relationship test

Section 672 defines a related or subordinate party as a nonadverse party who falls within one of two relationship categories. The first is the grantor's spouse, if living with the grantor. The second covers specified family members and certain employees or corporations connected with the grantor.^[1]

• The family members listed are the grantor's father, mother, issue, brother or sister.^[1]
• The other listed relationships include an employee of the grantor and certain corporate employees tied to significant stock holdings or the grantor's executive role.^[1]

The term therefore has two parts in this definition: the person must be nonadverse, and the person must meet a listed relationship category. Section 672 separately defines an adverse party by a substantial beneficial interest that would be adversely affected by exercising or not exercising the relevant power. A nonadverse party is a person who does not meet that adverse-party definition.^[1]

Presumption and statutory uses

For purposes of sections 674 and 675, a related or subordinate party is presumed to be subservient to the grantor when exercising or not exercising powers, unless the evidence shows otherwise by a preponderance. This is a presumption about the party's relation to the grantor in that setting.^[1]

Section 674 addresses powers of disposition over beneficial enjoyment. Its trustee exception applies only when no more than half of the trustees are related or subordinate parties who are subservient to the grantor's wishes, and other stated conditions are met. One condition is that none of the trustees is the grantor; the power also must be solely exercisable without another person's approval or consent.^[2]

Section 675 uses the related-party concept in a loan exception. Its treatment of an unpaid borrowing does not apply to a loan with adequate interest and adequate security when the lender is a trustee other than the grantor and other than a related or subordinate trustee who is subservient to the grantor. The exception thus specifies both the trustee's status and the loan terms.^[3]

Neighboring terms matter because the definition depends on whether a person is adverse or nonadverse, while the presumption concerns subservience. Sections 674 and 675 then apply those concepts to different powers and conditions.^[1]

Spouse provisions

Section 672 also contains a separate spouse attribution rule. It treats a grantor as holding certain powers or interests held by an individual who was the grantor's spouse when the power or interest was created. For a person who became a spouse afterward, that treatment applies only to later periods.^[1]

A legally separated individual is not considered married for the specified spouse rule. Section 677 separately addresses trust income that may be distributed to, accumulated for, or used to pay insurance premiums for the grantor or the grantor's spouse, subject to its stated exception for a later period tied to an event affecting grantor ownership.^[1]

These spouse rules are related context, but they do not change the definition's requirement that a related or subordinate party be nonadverse and fall within a listed category.^[5]

Questions and answers

Related terms

• 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.
• 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.
• Adverse party: Section 672 defines an adverse party by reference to a substantial beneficial interest in a trust and the effect of a power held over it in the trust.

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.
• Foreign Grantor Trust Rules for Non-U.S. Grantors: A non-U.S. grantor may be treated as owner of a foreign trust for U.S. tax purposes, including through revocation powers and sole lifetime beneficiary 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.

Related pages

• Glossary: All terms.
• Beneficiary other than the grantor treated as owner
• Grantor trust rules
• Income for the benefit of the grantor
• Nonadverse party
• IRS forms