Swap (Substitution) Powers in Trusts Can Reduce Income Taxes

Swap powers are an important but often overlooked opportunity in estate planning. Understanding what allowances swap powers provide can result in significant tax liability reductions. Attorneys working with clients to preserve assets should be aware of the potential benefits of swap powers and work them into estate planning strategies.

 

What are swap powers?

Swap powers grant the right to substitute—or swap—property of equal value in a trust. This causes a change in the cost basis of the property. Since the new basis will reduce capital gains, tax liability should be minimized when the asset is transferred.

Swap powers provide the ability to move a highly appreciated, low basis asset from an irrevocable trust into a grantor's estate. This means that the low basis is “stepped up” to the fair market value on the date of death of the grantor.

 

What makes swap powers important?

Many clients have assets in irrevocable trusts to protect themselves from estate taxes. Estate tax thresholds have been raised significantly. At the same time, income tax rates have been increased. These new income tax thresholds have been labeled as the new “death tax”. With this “death tax,” an important estate plan strategy is to make sure that heirs can take advantage of the step-up in basis when grantors pass away.

 

Under IRC 1014, one can receive a step-up in basis for assets held in one’s estate at death. This means that assets are reappraised at the fair market value at the date of death of the grantor. Heirs inherit the asset under this new cost basis, usually minimizing capital gains taxes if they sell the appreciated asset at a later date.

 

What’s important to note is that this step up provision does not apply to irrevocable trusts, since these are not considered part of the grantor’s estate. Without the provisions of IRC 1014, assets in the trust would be subject to higher capital gains taxes when sold.

 

If the grantor possesses a highly appreciated asset in the trust and wants to receive a step up in basis when passing this asset to heirs at death, it may be best to use swap powers in order to take advantage of the provisions applicable to estates.

The Purpose of a Gun or Firearm Trust

Americans as a whole passionately believe in gun ownership.  We express our Second Amendment right with approximately 233 million guns in private hands across the country.  It’s part of our ethos, along with self-reliance.  But with any right comes a duty to be accountable and responsible it seems to me. 

It is widely known that 7 of 10 Americans have no estate plans at all.  And a big percentage of most of those 10 own one or more firearms.  Firearms are not like stock certificates – whipping out a share of Microsoft and showing it off in Starbucks is not currently a crime.  The display of a firearm in the wrong setting may constitute “brandishing” which generally IS a crime.

The definition of a firearm includes guns but also “silencers”, “any other weapons” or “destructive devices”.  These last three, while not “guns”, are regulated as firearms under Title II of the Gun Control Act of 1968 (the National Firearms Act) along with machine guns, short-barreled rifles, and short-barreled shotguns which certainly are guns.  Title I of the 1968 Act regulates pistols, rifles, shotguns, giving much autonomy to state regulation of guns.

It’s no crime to own a stock certificate at 18.  It’s no crime to let somebody have the combination to your fireproof safe where you store it.  When you are at your broker’s office, showing off your Microsoft Stock Certificate Number 0001 and passing it around to let everyone handle it - it’s no crime.  If somebody was convicted of domestic violence, or if they use controlled substance, they can still have access to your stock certificate or even get it as a gift.

With a firearm, all of these things might constitute state and/or federal felonies with horrific penalties.  Mere access to a firearm, actual or constructive possession, a seemingly innocent transfer of a firearm can be crimes.  The definition of what constitutes a “transfer” under state or federal law is amorphous. 

A “gun trust” could be written as a “purpose trust” (often invalid from the start) or is more commonly a conventional living trust merely used to expedite acquisition of an NFA firearm.  Using an entity such as a corporation or trust avoids having to ask the local Chief Law Enforcement Officer to sign off on a request to transfer an NFA firearm.  An entity, like a trust, has no face or fingerprints so an application can be sent directly to the BATFE for a tax stamp to approve the transfer.  But the real issues addressed by instead using a real “purpose-built” gun trust are far more important.

So far, most Americans are not timely estate planners.  Firearms of any type introduce a whole new set of issues considering that some are heirlooms or badges of honor.  Passing on a firearms legacy must be done within the law with careful consideration of what it requires.

The Gun Docx® Trust system was developed for WealthCounsel members to help their firearms owning clients to do just that… and to avoid accidental felonies in the process.

Please contact us to investigate you firearms trust options, we offer 3 levels on gun trusts in both Massachusetts and New Hampshire.