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Gifting Property to a Trust With Reserved Powers

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.   

 

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Conditional Gifts, Gifts by Minors & Mistake of Fact or Law When Gifting

In previous articles we have discussed incomplete gifts and the power to revoke, and how such matters could impact making a gift in terms of estate planning and estate tax.  The article below will continue to discuss related matters, but focus more on conditional gifts, gifting to a minor and a mistake of fact.  Please remember to always discuss your specific estate planning and tax matters with your estate planning attorney, tax attorney and/or tax advisor.

Certain states will recognize the doctrine of a condition gift.  If your applicable state does recognize the doctrine of a conditional gift, the conditional gift transfer can be incomplete for gift tax purposes.  General property law principals would hold that a gift is complete and irrevocable upon completion of the transfer and acceptance by the donee (individual receiving the gift).  Under the conditional gift doctrine, a “gift” however can be subject to a condition and thus the initial transfer would not be deemed a completed gift for purposes of state property law if in fact the condition is not satisfied.  Thus, if the gift is not a completed gift under state law, it may not be a completed gift for federal tax purposes- estate tax and for purposes of your estate planning.  In terms of cases dealing with this issue, see Ver Brycke v. Ver Brycke, 379 Md. 669, 84 A.2d 758 (Md. 2004).

Gifts by minors bring certain questions and issues into consideration as well.  Because a minor is legally incompetent, a minor makes a gift and transfers property to another person the transfer may be disavowed by the minor, and the ability to disavow could cause the gifted property to go back to the minor who gifted the property.  Thus, is this a completed gift when a minor transfers property?  A gift by a minor is incomplete for federal gift tax purposes if under the applicable state law, the gift can be reverted back to the donor for a reasonable time after the minor has reached the age of majority in the applicable state.  Under these circumstances, the gift from the minor would be considered complete when the minor’s power disavow the gifted property lapses and the minor can no longer “take back” the property.

If a grantor has made a unilateral mistake of fact or law, a gift into trust can be considered incomplete if state law would allow for the revocation  For example, if a donor incorrectly transferred the incorrect (or unanticipated) amount of property, the transfer could be considered incomplete and not subject to gift tax.  However, it is important to note that a mistake as to the tax consequences of a gift will generally not allow the gift to be considered an incomplete gift.

The gifting of property can be an important part of estate planning, but has many tax implications and issues to consider.  Thus, it is important to discuss gifting issues with an estate planning attorney or tax attorney.  You can speak with a Denver estate planning attorney and tax attorney by contacting the McGuire Law Firm.

Contact The McGuire Law Firm to schedule a free consultation with a Denver tax attorney and estate planning attorney!

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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.