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Title 26 — Internal Revenue CodeRelease 119-73

§673 Reversionary interests

Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter J— - Estates, Trusts, Beneficiaries, and Decedents › Part PART I— - ESTATES, TRUSTS, AND BENEFICIARIES › Subpart Subpart E— - Grantors and Others Treated as Substantial Owners › § 673

Last updated Apr 6, 2026|Official source

Summary

Treat the person who set up a trust as the owner of any part of that trust if, when that part begins, the person’s right to get the property back (either the trust money or its income) is worth more than 5 percent of that part. The rule also covers situations where a beneficiary is a direct descendant and holds all current rights in a trust part. When you value the right to get the property back, assume the person will get the biggest possible benefit. If the date to get the property back is delayed, that delay counts as a new transfer starting when the delay begins and ending on the new date. Income is not added to the person’s income for any period if it would not have been added without the delay.

Full Legal Text

Title 26, §673

Internal Revenue Code — Source: USLM XML via OLRC

(a)The grantor shall be treated as the owner of any portion of a trust in which he has a reversionary interest in either the corpus or the income therefrom, if, as of the inception of that portion of the trust, the value of such interest exceeds 5 percent of the value of such portion.
(b)In the case of any beneficiary who—
(1)is a lineal descendant of the grantor, and
(2)holds all of the present interests in any portion of a trust,
(c)For purposes of subsection (a), the value of the grantor’s reversionary interest shall be determined by assuming the maximum exercise of discretion in favor of the grantor.
(d)Any postponement of the date specified for the reacquisition of possession or enjoyment of the reversionary interest shall be treated as a new transfer in trust commencing with the date on which the postponement is effective and terminating with the date prescribed by the postponement. However, income for any period shall not be included in the income of the grantor by reason of the preceding sentence if such income would not be so includible in the absence of such postponement.

Legislative History

Notes & Related Subsidiaries

Editorial Notes

Amendments

1988—Subsecs. (c), (d). Pub. L. 100–647 added subsecs. (c) and (d). 1986—Pub. L. 99–514 amended section generally, substituting “the value of such interest exceeds 5 percent of the value of such portion” for “the interest will or may reasonably be expected to take effect in possession or enjoyment within 10 years commencing with the date of the transfer of that portion of the trust” in subsec. (a), adding subsec. (b), striking out subsec. (c) which provided that the grantor not be treated under subsec. (a) as the owner of any portion of a trust where his reversionary interest in such portion was not to take effect in possession or enjoyment until the death of the persons to whom the income therefrom was payable, and subsec. (d) which provided that any postponement of the date specified for the reacquisition of possession or enjoyment of the reversionary interest be treated as a new transfer in trust commencing with the date on which the postponement was effected and terminating with the date prescribed by the postponement. 1969—Subsec. (b). Pub. L. 91–172 struck out provisions relating to trusts where the income was payable to a charitable beneficiary for at least a two-year period.

Statutory Notes and Related Subsidiaries

Effective Date

of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date

of 1986 Amendment Pub. L. 99–514, title XIV, § 1402(c), Oct. 22, 1986, 100 Stat. 2712, provided that: “(1) In general.—Except as provided in paragraph (2), the

Amendments

made by this section [amending this section and section 674, 676, and 677 of this title] shall apply with respect to transfers in trust made after March 1, 1986. “(2) Transfers pursuant to property settlement agreement.—The

Amendments

made by this section shall not apply to any transfer in trust made after
March 1, 1986, pursuant to a binding property settlement agreement entered into on or before
March 1, 1986, which required the taxpayer to establish a grantor trust and for the transfer of a specified sum of money or property to the trust by the taxpayer. This paragraph shall apply only to the extent of the amount required to be transferred under the agreement described in the preceding sentence.”

Effective Date

of 1969 AmendmentAmendment by Pub. L. 91–172 applicable to transfers in trust made after April 22, 1969, see section 201(g)(3) of Pub. L. 91–172, set out as a note under section 170 of this title.

Reference

Citations & Metadata

Citation

26 U.S.C. § 673

Title 26 — Internal Revenue Code

Last Updated

Apr 6, 2026

Release point: 119-73