Beneficiary other than the grantor treated as owner
Section 678 of the Internal Revenue Code describes when a person other than the grantor is treated as owner of part of a trust. The rule turns on a power over trust corpus or income and several stated exceptions.
Meaning under section 678
Section 678 treats a person other than the grantor as owner of a trust portion when that person has a power, exercisable solely by himself, to vest its corpus or income in himself. The provision also covers a person who modified or partly released such a power but retains control that would make a grantor an owner under sections 671 through 677.[6]
The rule applies portion by portion. Its first route concerns a power that the holder can exercise alone to place trust property or income in himself. Its second route concerns retained control after a partial release or other modification of that same kind of power.[6]
Section 678 appears among the grantor trust provisions and gives a separate ownership rule for a person other than the grantor. Sections 674 through 677 describe circumstances in which the grantor is treated as owner, including powers over beneficial enjoyment, certain administrative powers, revocation, and income for the grantor's benefit.[6]
Section 672 supplies definitions used across this subpart. An adverse party has a substantial beneficial interest that would be adversely affected by exercising or not exercising a power, while a nonadverse party is a person who is not an adverse party.[1]
Section 678 excludes a power over income when the grantor or a transferor covered by section 679 is otherwise treated as owner under another provision of the subpart. This exception is limited to the stated power over income.[6]
A trustee or cotrustee's power to apply income merely for support or maintenance of someone the holder is obligated to support generally falls outside subsection (a). The exception does not apply to the extent the income is actually applied for that support. If amounts come from corpus or from income other than the taxable year's income, the statute treats them as paid or credited and taxes them to the power holder under section 662.[6]
The general rule also does not apply to a power renounced or disclaimed within a reasonable time after its holder first became aware of it. Section 678 separately points to section 1361(d) for a trust beneficiary treated as owner of a portion consisting of S corporation stock.[6]
The neighboring grantor rules focus on different powers and benefits. Section 674 addresses disposition over beneficial enjoyment without an adverse party's consent, section 676 addresses a power to revest title in the grantor, and section 677 addresses income payable or usable for the grantor or spouse, subject to its conditions and exception.[2]
Quick reference
| Topic | Rule |
|---|---|
| Covered holder | A person other than the grantor may be treated as owner of a trust portion.[6] |
| Sole power | The person can alone vest corpus or income in himself.[6] |
| Modified power | A prior partial release or other change may leave owner-level control.[6] |
| Disclaimed power | A timely renunciation or disclaimer is excluded from the general rule.[6] |
| Support use | The support exception does not apply to the extent income is actually applied for support.[6] |
Questions and answers
What power can make a non-grantor a trust owner under section 678?
The rule covers a person who can act alone to vest trust corpus or income in himself. It also covers certain retained control after that power is partly released or otherwise modified.[6]
Does section 678 apply if the grantor is already treated as owner?
For a power over income, subsection (a) does not apply when the grantor or a transferor covered by section 679 is treated as owner under another provision of the subpart. The exception applies specifically to a power over income.[6]
How does the support exception work?
A trustee or cotrustee's power merely to apply income for a person's support or maintenance is excluded, where the holder is obligated to provide that support. The exclusion does not apply to the extent income is actually so applied.[6]
What if the holder disclaims the power?
The general rule does not apply to a power renounced or disclaimed within a reasonable time after the holder first became aware of it. Section 678 does not state a fixed number of days for that period.[6]
How does section 678 relate to the grantor rules?
Sections 674 through 677 describe situations where the grantor is treated as owner based on powers or income benefits. Section 678 instead addresses a person other than the grantor, while its modified-power test looks to the principles of sections 671 through 677.[6]
Does section 678 mention S corporation stock?
Yes. Its cross-reference identifies a provision under which a trust beneficiary is treated as owner of the trust portion consisting of S corporation stock, under section 1361(d).[6]
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.
- 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.
- 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.
- 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.
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
Sources and data notes
- Internal Revenue Service, 26 U.S.C. 672. https://uscode.house.gov/us/usc/119-118/t26/s672/. Retrieved .
- Internal Revenue Service, 26 U.S.C. 674. https://uscode.house.gov/us/usc/119-118/t26/s674/. Retrieved .
- Internal Revenue Service, 26 U.S.C. 675. https://uscode.house.gov/us/usc/119-118/t26/s675/. Retrieved .
- Internal Revenue Service, 26 U.S.C. 676. https://uscode.house.gov/us/usc/119-118/t26/s676/. Retrieved .
- Internal Revenue Service, 26 U.S.C. 677. https://uscode.house.gov/us/usc/119-118/t26/s677/. Retrieved .
- Internal Revenue Service, 26 U.S.C. 678. https://uscode.house.gov/us/usc/119-118/t26/s678/. Retrieved .
Dates in this block record when each source was read for this page.