Disclaimer: The following is for informational purposes only. It is not intended to constitute legal advice, or to recommend a course of action, and does not create an attorney-client relationship between the reader and Renuka Somers, or Somers Tax Law, PLLC.

The Grantor Trust Rules are contained in Sections 671-679 of the Internal Revenue Code (IRC).

A grantor is a person who:

1. Makes a gratuitous transfer to the trust,
2. Holds a power described in IRC sections 673-677 and:
   1. A reversionary interest in the corpus or income (exceeding 5% of initial value).
   2. Power over the beneficial enjoyment of trust corpus or income, either for oneself or others).
   3. Certain powers over disposition, borrowing, or investment of trust property.
   4. The power to revest title in themselves.
   5. Right to receive current or future distributions of trust income – either to self or to third parties.

   These rules apply where the grantor may exercise such powers either for themselves, or for the benefit of others. They may also apply where the powers are exercisable by the grantor or a “Nonadverse Party”, or both, without the approval or consent of any “Adverse Party”.

   • An “Adverse Party” is any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or non exercise of the power which the grantor possesses (for example, another beneficiary): IRC Section 672(a).
   • A “Nonadverse Party” means any person who is not an adverse party, and includes a related or “related or subordinate party” such as the grantor’s spouse (the grantor is deemed to hold powers that a spouse holds), parents and siblings, the grantor’s issue, and an employee of the grantor (including of a corporation in which the grantor has voting control or is an executive): IRC Sections 672(b),(c).
3. Holds a power exercisable solely by themselves, to vest trust capital or income in themselves: IRC Section 678.

Issues with Foreign Trusts: IRC Section 679

Grantor trust status can apply where:

• A foreign trust has a U.S. person who is a grantor or beneficiary.
• A foreign grantor becomes U.S. person within 5 years of transferring property to such a trust.
• A U.S. trust becomes a foreign trust.

Transfers to Foreign Trusts: IRC Section 684

• A transfer of property by a U.S. person to a foreign trust can result in the realization and recognition (for U.S. tax purposes) of built-in gains. However, if a U.S. person is treated as owner/grantor of the foreign trust, no gain is recognized.
• If the trust becomes a foreign trust, the trust’s assets are treated as having been transferred to the foreign trust.