Grantor Trust Rules

• Under the Grantor Trust Rules, where the grantor is deemed to be the owner of the trust -- for example when the grantor retains excessive control over the trust -- the grantor is taxed upon the income, rather than the beneficiary or the trust itself. As the owner of the trust, the grantor must include all the items of income, deductions and credits of the trust on his return. Additionally, under the estate tax, the trust corpus, which the grantor is deemed to be the owner of, its value is included in the value of his estate.
  
  

Adverse Party Rule

• The test the Internal Revenue Code uses to determine whether the grantor is the trust owner is the Adverse Party Rules. Under this rule, If the grantor or the trustee exercises a power retained in the trust that would adversely affect a beneficiary’s interest in the trust, then the grantor is deemed the owner of the trust. This ownership interest applies to the extent that such income or corpus can be affected. For example, where the grantor or a nonadverse party, such as the trustee, has the discretion to distribute the income to the grantor or grantor’s spouse, the grantor is deemed the owner of the trust. Additionally, if the grantor surrenders the power or interest that caused him to be treated as the owner of the trust, the subsequent income, deduction and credits of the trust will be taxed normally.
  
  

Powers of Disposition

• Under IRC 674 Powers of Disposition, if the grantor, his spouse or a nonadverse party has the power to decide who gets the trust income or corpus, or when they get it, then the grantor will be treated as the trust owner. Exception to this rule is when the exercise of this power is limited to require the consent of the adverse party and Charitable Trusts and in the case of a Support Trust where the exception is limited.
  
  

Charitable and Support Trusts Exceptions

• Under Section 674(b)(4), the grantor is not deemed the owner of a trust where the grantor, spouse or nonadverse party has the power to distribute corpus or income to charitable institutions and such distributions are irrevocable. A limited exception to Section 674 is the support trust. Where the trust income can be used to support a beneficiary -- other than the grantor’s spouse, whom the grantor is legally obligated to support -- the grantor is treated as the owner of the trust only to the extent the income is, in fact, used for such purpose.
  
  

Revocation or Reversion

• Where either the grantor, the grantor’s spouse, or a nonadverse party has the power to revoke the trust, the grantor is treated as the owner of the trust. Furthermore, where the trust can revert to the grantor or grantor’s spouse, at anytime, and the reversionary interest is worth at least 5 percent of the corpus, then the grantor will be taxed for the trust income. However, the exception to this rule is where the reversion is limited to occur on the death of the beneficiary, who is a lineal descendant and has not reached the age of 21.
  
  

Administrative Powers

• Where the grantor or a nonadverse party has administrative powers, such as power to purchase with, take a loan of, or otherwise deal with the trust corpus or income for less than adequate consideration in monetary value, then the grantor is treated as the owner of the trust. This is unless the trustee has the independent power to make such loans to anyone without such consideration or security.