Also known as: related parties · subordinate parties · affiliates · subsidiaries
Written by attorneys · grounded in primary & secondary sources — see below
Persons such as certain family members and employees who are presumed to act in accordance with a grantor's directions rather than independently. The classification determines whether a trustee qualifies as independent for purposes of exercising broad distribution powers without causing the grantor to be treated as the owner of the trust under the grantor trust rules.
Grantor Elena creates a trust holding family business interests and names her brother and a longtime employee as two of the three trustees. Because both qualify as related or subordinate parties, more than half the trustees fall into that class, so the trust fails the independent-trustee safe harbor and Elena is treated as owner under the grantor-trust rules.
Grantor Michael funds an irrevocable trust and appoints his adult daughter and his controlled LLC's CFO as trustees. The two related or subordinate parties together constitute more than half the trustees, causing the IRS to treat Michael as the owner of the trust for income-tax purposes.
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The classification includes the grantor's spouse, parents, siblings, children, and certain employees or subordinates who are presumed to follow the grantor's wishes. Trustees who fall into this group cannot be counted as independent when more than half the trustees are so classified.
Supporting sources
The statute requires that independent trustees hold the power to distribute or accumulate income or corpus without the grantor's consent. When more than half the trustees are related or subordinate parties, the safe harbor is lost and the grantor is treated as owner of the trust.
Supporting sources
Affiliates are defined through control relationships that parallel the related-party concept. When directors or officers hold interests in a buyer, the transaction may be scrutinized as involving related or subordinate parties for purposes of shareholder approval requirements.