Grantor Trusts and Key Parties Under IRC Section 672

Examining relationships to grantor and trust

For a series index on the other articles in this grantor trusts series, click here.

Table of Contents

1. Where We Left Off

2. Adverse Versus Nonadverse Parties

3. Related or Subordinate Parties

4. Key Points for Practitioners

Where We Left Off

Last time, we discussed substitution powers as the most widely-used power that is included in a trust in order to (1) create deemed income tax ownership for the grantor, without (2) automatically causing gross estate inclusion by virtue of the power itself. Recall that our cardinal concern in grantor trust planning is avoiding item (2) by identifying income tax powers that a grantor can retain without creating estate tax retained interests under IRC Sections 2035-2038.

Before picking back up on a further discussion of retained grantor trust powers – whether in the form of a substitution power, or something else – it is important to note that it is not always powers retained by the grantor themselves that can lead to deemed income tax ownership. On occasion, powers of a trustee or another individual might get attributed to a grantor. In order to get there, IRC Section 672 carves out four key roles from which we must explore the relationship to a grantor. These roles generally include:

• An adverse party, as defined in IRC Section 672(a);

• A nonadverse party (sometimes also hyphenated out to non-adverse party), as defined in IRC Section 672(b);

• A related or subordinate party, as defined in IRC Section 672(c); and

• A spouse, under attribution rules of IRC Section 672(e).

This article focuses on adverse, nonadverse, and related or subordinate parties. We will discuss spousal attribution in a separate article.

Before moving on, note that this list is not all-inclusive. For example, when it comes to exploring rules regarding foreign trusts or foreign fiduciaries, there may be deemed income tax ownership notwithstanding some of these relationships. These rules and relationships typically apply to a grantor (and not a beneficiary) as deemed owner under IRC Section 678(a)(1), but may apply to a beneficiary under IRC Section 678(a)(2). And since the Tax Cuts and Jobs Act of 2017 eliminated IRC Section 682, which turned off grantor trust status upon divorce, this has left questions about whether a former spouse may still attribute powers to a grantor.

Adverse Versus Nonadverse Parties