Revocable Transfer Discussed by Estate Planning Attorney

Often when property is gifted, whether directly or perhaps into a trust agreement, the transfer may be incomplete or only partially complete.  An incomplete gift may be from design, and some estate planning attorneys will use an incomplete gift purposefully within an overall estate plan.  Other times, the gift may be incomplete, but not necessarily on purpose.  A gift can be incomplete because of a power to revoke, certain reserved powers and under other circumstances.  The article below has been prepared by an estate planning to provide information relating to an incomplete gift due to the transfer being revocable.  Please remember to discuss your estate matters directly with your estate planning attorney.

When a donor gifts property, whether the gift is into a trust agreement or otherwise is incomplete to the extent the donor has the right or reserves the right to revoke the transfer.  The ability to revoke the transfer or revocation power could be a directly expressed or implied based upon the facts and circumstances.  If a transfer is subject to a revocation power, the transfer or gift becomes complete only when the donor’s power to revoke the gift has terminated or has been relinquished.

As stated above, the power to revoke can be implied if a trust agreement indicates that the donor, in essence has reserved the power to revoke.  One court case within the United States Tax Court, In Mandels Est. v. Commissioner, 64 T.C. 61 (1975), the court determined that the grantor’s initial transfer into the trust agreement was not a complete gift because a gift into trust was revocable under state law (New York State law).  The court made this determination even though the trust agreement did not expressly provide for a revocation power.  However, within the trust agreement, the donor maintained the majority of the elements one would consider regarding incidents of ownership over shares of the stock of a closely held corporation that were transferred into the trust.  In Mandels, the trust agreement specifically prevented the trustees from selling, transferring, pledging or encumbering the stock.  Furthermore, the trustees could take no action or proceedings regarding the stock of the closely held corporation.  Furthermore, the donor (trust grantor) retained the rights the stock dividends as well as redemption and liquidation proceeds, as well as the right to vote the shares.  Thus, under these circumstances, the donor or grantor had retained too much power, or the implied ability to revoke the transfer and thus the gift was deemed incomplete.

A gift that is deemed incomplete may impact an individual’s overall estate plan and estate or gift tax consequences.  Thus, it is important that you consider these issues with your estate planning attorney and tax attorney when drafting estate planning documents.  You can speak with a Denver estate planning attorney and tax attorney by contacting The McGuire Law Firm.