§672 Definitions and rules

Summary

Defines who counts as an adverse party, a nonadverse party, and a related or subordinate party for trust rules, and says when a power is treated as being held by someone. An adverse party is anyone with a real financial interest in the trust that would be hurt if a power over the trust were used or not used. A person with a general ability to choose who gets trust property is treated as having such an interest. A nonadverse party is anyone who is not adverse. A related or subordinate party is a nonadverse person who is the trust maker’s spouse (if living together) or close family, an employee, certain corporate officers or employees with voting ties, or a lower-level employee of a company where the trust maker is an executive. A power counts as held even if you must give notice or wait for a set time before it takes effect. If someone is or later becomes the trust maker’s spouse, the trust maker is treated as holding powers that the spouse holds (but not if they are legally separated). Limits in these rules only apply when they cause an amount to be included now in the income of a U.S. citizen, resident, or a domestic corporation. Exceptions include trust parts where the trust maker alone can revest title, or where only the trust maker or the maker’s spouse can receive distributions while the maker is alive. Parts taxed as pay for services also are generally excluded under regulations. A controlled foreign corporation is treated as domestic for this test (see section 957), and paragraph (1) does not apply for rules under section 1297. The IRS Secretary can make rules, recharacterize certain transfers, and provide additional exceptions as needed.