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Adverse party

Section 672 defines an adverse party by reference to a substantial beneficial interest in a trust and the effect of a power.

Section 672 of the Internal Revenue Code defines an adverse party as a person whose substantial beneficial interest in a trust would be adversely affected by the exercise or nonexercise of a power held by that person.[1]

A person with a general power of appointment over trust property is treated as having a beneficial interest. The neighboring term nonadverse party means a person who does not meet the adverse party definition.[1]

Section 672 also defines a related or subordinate party as a nonadverse party in specified relationships or positions, including a grantor's spouse living with the grantor, parent, issue, sibling or employee, or a subordinate employee of a corporation in which the grantor is an executive. For sections 674 and 675, that party is presumed subservient to the grantor unless evidence shows otherwise under the stated standard.[1]

How the term appears in the ownership rules

The definition matters in section 674, which addresses beneficial enjoyment. The grantor is treated as owner of a trust portion when disposition of its income or corpus may be controlled by the grantor or a nonadverse party without an adverse party's approval or consent.[2]

Section 674 lists exceptions to that rule. They include certain powers to distribute corpus under a reasonably definite standard and certain powers over income held by trustees meeting specified independence or standard conditions. Some exceptions do not apply when a person can add beneficiaries, except for after-born or after-adopted children.[2]

Section 675 uses the term for administrative powers. It addresses powers allowing dealings with trust property for less than adequate consideration, and borrowing powers, when the grantor or a nonadverse party can act without adverse-party approval or consent.[3]

Sections 676 and 677 use a related consent condition. Section 676 addresses a power to revest title in the grantor held by the grantor or a non-adverse party. Section 677 concerns trust income that may benefit the grantor or spouse without adverse-party approval or consent, subject to its stated exception for certain future periods.[4]

Section 672 also treats certain powers as present even when exercise requires prior notice or takes effect after a waiting period.

How it differs from a beneficiary's power

Section 678 addresses a different role. It generally treats a person other than the grantor as owner of a trust portion when that person alone can vest the corpus or income in himself. The section also provides exceptions, including when the grantor or a covered transferor is otherwise treated as owner with respect to a power over income.[6]

Questions and answers

Does a general power of appointment count as a beneficial interest?

Yes. Section 672 treats a person holding a general power of appointment over trust property as having a beneficial interest in the trust. The adverse-party definition still turns on whether the substantial interest would be adversely affected by exercise or nonexercise of the relevant power.[1]

What does nonadverse party mean?

Section 672 defines a nonadverse party as someone who is not an adverse party. Sections 674 and 675 refer to a nonadverse party when describing powers that may operate without adverse-party consent.[1]

When does the adverse-party definition matter under section 674?

It matters when beneficial enjoyment of trust income or corpus is subject to a power held by the grantor or a nonadverse party. The general rule describes that power as exercisable without approval or consent from an adverse party, while the section lists exceptions.[2]

Can a notice period affect whether a person has a power?

Section 672 says a person is treated as having a covered power even if its exercise is subject to prior notice. It also includes a power that takes effect only after a stated period following its exercise.[1]

How does section 678 relate to adverse parties?

Section 678 concerns a person other than the grantor who can act alone to vest trust corpus or income in himself. Its general rule differs from the approval-or-consent conditions that sections 674 and 675 state for adverse parties.[6]

  • 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.
  • 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.
  • 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.
  • 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.

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Sources and data notes
  1. Internal Revenue Service, 26 U.S.C. 672. https://uscode.house.gov/us/usc/119-118/t26/s672/. Retrieved .
  2. Internal Revenue Service, 26 U.S.C. 674. https://uscode.house.gov/us/usc/119-118/t26/s674/. Retrieved .
  3. Internal Revenue Service, 26 U.S.C. 675. https://uscode.house.gov/us/usc/119-118/t26/s675/. Retrieved .
  4. Internal Revenue Service, 26 U.S.C. 676. https://uscode.house.gov/us/usc/119-118/t26/s676/. Retrieved .
  5. Internal Revenue Service, 26 U.S.C. 677. https://uscode.house.gov/us/usc/119-118/t26/s677/. Retrieved .
  6. Internal Revenue Service, 26 U.S.C. 678. https://uscode.house.gov/us/usc/119-118/t26/s678/. Retrieved .

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