Text or WhatsApp (808) 600-9260

Power to control beneficial enjoyment

Section 674 of the Internal Revenue Code describes when control over trust benefits causes a grantor to be treated as the owner of a trust portion.

Meaning and location

Section 674 uses the heading "Power to control beneficial enjoyment" for a rule about a power to decide who benefits from trust property or income. The rule treats the grantor as owner of a portion when beneficial enjoyment of its corpus or income is subject to a power of disposition exercisable by the grantor, a nonadverse party, or both, without consent from an adverse party.[2]

Section 674 is part of the grantor trust rules, which define ownership treatment for portions of a trust. Section 672 defines the terms adverse party and nonadverse party used in section 674.[1]

Conditions and exceptions

The general rule focuses on the holder of the disposition power and whether an adverse party must approve or consent. A person with a substantial beneficial interest that would be adversely affected by exercise or nonexercise of the power is an adverse party; a nonadverse party is any person outside that definition.[1]

Section 674 lists exceptions for specified powers, regardless of who holds them. They include certain distribution powers, powers that begin to affect income only after a qualifying event, testamentary powers subject to a stated qualification, and powers to allocate between corpus and income. The event exception can cease to apply after the event unless the power is relinquished.[2]

A separate exception concerns powers held solely by trustees who are not the grantor. It applies to certain income or corpus decisions when no more than half of the trustees are related or subordinate parties subservient to the grantor. A separate income allocation exception requires a reasonably definite external standard in the trust instrument and excludes a grantor or spouse living with the grantor from the trustee group.[2]

Section 672 also addresses family and other relationships. A related or subordinate party is presumed subservient to the grantor for sections 674 and 675 unless shown otherwise by a preponderance of the evidence. The grantor is also treated as holding certain powers or interests held by a spouse, subject to the statutory timing rule.[1]

Neighboring provisions address distinct powers. Section 675 covers specified administrative powers, including certain dealings for less than adequate consideration, borrowing, and nonfiduciary administrative powers. Section 676 addresses a power to revest trust title in the grantor, while section 677 addresses income payable to or accumulated for the grantor or spouse, or used for specified insurance premiums.[3]

Section 678 concerns a person other than the grantor who can vest trust corpus or income in themselves. It includes an exception for certain income powers when the grantor or a section 679 transferor is otherwise treated as owner under another provision of the subpart.[6]

Questions and answers

What does beneficial enjoyment mean in this provision?

Section 674 applies when the benefit of trust corpus or income is subject to a power of disposition. The rule identifies who may exercise that power and whether an adverse party's consent is required.[2]

Who is a nonadverse party?

Section 672 defines a nonadverse party as a person who is not an adverse party. An adverse party has a substantial beneficial interest that would be adversely affected by exercising or not exercising the power.[1]

Can a trustee power fall within an exception?

Section 674 provides exceptions for certain powers held solely by trustees who are not the grantor, subject to conditions on trustee relationships and beneficiary additions. It also describes an income allocation exception tied to a reasonably definite external standard in the trust instrument.[2]

How does this relate to the power to revoke?

Section 676 covers a power to revest title to a trust portion in the grantor when the grantor or a nonadverse party can exercise it. Section 674 instead addresses a power of disposition affecting who enjoys the corpus or income.[4]

  • 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 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.
  • 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.
  • 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.

Talk to Richard

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 .

Dates in this block record when each source was read for this page.