Many individuals will transfer property into a trust and think they have made a gift. These individuals may be right, or they may be wrong under certain circumstances. It is not uncommon for the donor, or person placing property into the trust to want to have and hold certain powers over the trust property. These transfers into the trust with reserved powers may not be a complete gift for gift tax purposes. The article below will provide addition information regarding transfers into trust that can be revoked or amended. Please remember the article and information below are for informational purposes and you should discuss the tax implications of transfers into a trust with your tax attorney.
Under the regulations, when an individual transfers property into a trust but holds the power to revoke or amend the trust in certain ways, the gift or transfer is considered incomplete for gift tax purposes. The transfer is incomplete regardless of whether the power is held only by the donor or can be exercised only with the consent of another individual when such individual does not have a substantial interest adverse to the donor exercising their power. The Treasury Regulations under Section 25.2511-2(e) state, “A donor is considered to as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property or the income therefrom. A trustee, as such, is not a person having an adverse interest in the disposition of the trust property or its income.”
The idea behind an individual having a substantial adverse interest to the donor is, if the other individual has no reason not to agree with the decisions made by the donor, the power is essentially left to the donor to make decisions unilaterally and alone. However, if the donor’s power to revoke can only be exercised with the agreement and acquiescence an individual with an adverse interest to the disposition of the property held in trust or the income created by the trust property, the gift is complete. Practical thought would lead to the decision that an individual with an adverse interest, would generally not agree with the donor regarding the donor exercising certain revocation powers, and thus the donor is considered to have relinquished enough of the necessary control of the property transferred into the trust, such that the transfer of property is a complete gift.
It may go without saying after reading and considering the above, but a transfer of property whereby the donor has the sole authority (when looking at the terms of the trust) to revoke would be an incomplete gift for gift tax purposes, even though it would appear the donor needs the acquiescence of a third party with an adverse interest. Thus, consider substance over form when reviewing certain provisions of a trust document.
If you have tax questions regarding gifting property, you can speak with a tax attorney in Denver by contacting The McGuire Law Firm.