Remember all the silly rules we lived by as kids? Most of them are all lost in the fog that is my memory of those years, but the "No Take-Backs" is pretty fresh in my mind. Why? All of the gifting we execute as part of financial or estate plans. A rather common concern is the loss of control that comes with gifting away an asset, and I am sure that more than one person has wished that they could take it back. Don’t get too excited, irrevocable still means irrevocable. Some recent legislation, however, leaves a backdoor open for someone who has gifted away an asset that they want back in their control.
Why is this more important now than ever before? The possibility of large lifetime gifts created by the increased lifetime gift limits that we have under current law. No longer are irrevocable trusts funded solely with annual exclusion gifts to pay annual insurance premiums. Revenue Ruling 2011-28
outlines exactly how to manage this type of situation, and it all starts with smart trust design. What do I mean about smart ILIT design? Begin with the end in mind. Establish the trust with the maximum flexibility for the grantor, including language that allows substitution.
Aside from the design of the trust, Revenue Ruling 2011-28
outlines all of the important considerations when substituting trust assets. That’s right, the grantor has the ability to swap out the previously gifted asset for one of equal value, all while keeping the trust and its assets safely outside his or her estate. While that is about as far as I want to dip my toes into trust design (note that the initials JD are absent from my signature line), I think it does make sense to investigate why this might be attractive: market cycles and the nature of the assets in question.
Consider the strategy that is more than likely the foundation of one of these lifetime gifts – let’s take an asset that is likely to grow rapidly and place it outside the estate so that all of the future growth is not subject to estate tax. Sounds simple, right? Well, what if that growth does not happen, and all of the sudden this OTHER asset that is still in the estate takes off? Maybe we want to trade them out? While the answer to that question is certainly going to be case specific, having designed the trust so that the possibility of a substitution exists increases the planning options for the grantor and the rest of his or her family exponentially.
One note of caution – the Revenue Ruling
above is obviously not the only piece of the tax code that governs these trusts, so selecting a bona fide Estate Planning Attorney is critical. This also requires a true estate plan that addresses topics far beyond the simple estate tax mitigation that passes for estate planning in many cases. There is much more to the story than taxes!