26 U.S.C. § 674, Power to control beneficial enjoyment

26 U.S.C. § 674 matters to a U.S. citizen with a connection to a trust. The section covers the ownership rule, listed exceptions and its limited relevance to foreign trust reporting.

Scope of section 674

Section 674 is part of the Internal Revenue Code and addresses when a grantor is treated as the owner of a portion of a trust. Its central rule turns on who can control the beneficial enjoyment of trust principal or income.^[1]

The official document is published in the United States Code Online by the Office of the Law Revision Counsel, an office of the United States House of Representatives. The text appears under Title 26, Internal Revenue Code, in Chapter 1, Normal Taxes and Surtaxes. The official text can be found by searching for 26 U.S.C. § 674 on uscode.house.gov.^[1]

The section focuses on powers affecting beneficial enjoyment. It distinguishes a power over income from a power over corpus, the statutory term for trust principal, and supplies conditions under which certain powers do not trigger its general rule.^[1]

The general ownership rule

Under subsection (a), the grantor is treated as owner of the affected trust portion when beneficial enjoyment of its corpus or income is subject to a power of disposition held by the grantor, a nonadverse party, or both. The rule applies when the power can be exercised without approval or consent from an adverse party.^[1]

This is a portion-by-portion rule. A power over one part of a trust does not automatically make the grantor owner of every part. The analysis described by the section concerns the power over the beneficial enjoyment of the specific portion.^[1]

Exceptions and trustee powers

Subsection (b) lists eight types of power that are outside the general rule, subject to conditions in the text. They include certain dependent-support powers and powers whose effect begins only after a qualifying event. A will-only power is also excepted, with a stated qualification for accumulated income that the grantor may appoint by will.^[1]

Other exceptions concern specified charitable purposes or an employee stock ownership plan, and distributions of corpus under described conditions. One exception concerns corpus distributions to beneficiaries or a beneficiary class under a reasonably definite standard set out in the trust instrument. A separate provision addresses a distribution to a current income beneficiary and its charge against that beneficiary's proportionate share.^[1]

The text also addresses temporary withholding or accumulation of income. The accumulated amount must ultimately be payable through one of the routes described in subsection (b), including payment to the beneficiary or specified payments when the trust terminates. Another exception applies during a beneficiary's legal disability or while that beneficiary is under age 21.^[1]

Subsections (c) and (d) describe additional exceptions for trustee powers. Subsection (c) covers certain income and corpus decisions by trustees who are not the grantor, subject to the stated limits on who may serve. Subsection (d) covers certain income decisions by trustees who are neither the grantor nor a spouse living with the grantor, when a reasonably definite external standard appears in the trust instrument.^[1]

Several exceptions have an additional restriction concerning who may be added as a beneficiary. The section generally excludes a power from those exceptions if a person can add beneficiaries or a beneficiary class. It states an exception to that restriction for additions involving after-born or after-adopted children.^[1]

Connection to foreign trust reporting

For a U.S. citizen connected to a foreign trust, section 674 provides an income tax ownership rule to read alongside the trust's powers. This section does not identify foreign trust reporting forms, foreign account reporting regimes, or filing thresholds. It therefore cannot, by itself, establish which reporting requirements apply to a U.S. citizen in a particular foreign trust or account situation.^[1]

It does not set out procedures for reporting foreign trusts or foreign accounts. The official text is part of the United States Code, under Title 26 and Chapter 1.^[1]

Questions and answers

What does 26 U.S.C. § 674 address?

It addresses when a grantor is treated as the owner of a portion of a trust. The rule concerns a power of disposition over beneficial enjoyment of corpus or income, under specified conditions.^[1]

Which powers can bring the general rule into play?

The power may be held by the grantor, a nonadverse party, or both. The rule describes a power exercisable without an adverse party's approval or consent.^[1]

Does section 674 list exceptions?

Yes. Subsection (b) lists eight categories, including certain powers to distribute corpus and to allocate receipts and disbursements between corpus and income.^[1]

Does this section specify foreign trust forms?

Section 674 does not specify foreign trust or foreign account reporting forms. It sets out an income tax rule for treating a grantor as owner of part of a trust.^[1]

Where can a reader find the official text?

The official text is available through the United States Code Online at uscode.house.gov. Search for 26 U.S.C. § 674, titled Power to control beneficial enjoyment.^[1]

Related glossary terms

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.
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.
Discretionary trust: A discretionary trust leaves distribution decisions to the trustee. It differs from a fixed interest trust and from a protective trust in who controls payments.