2.2.1 Impact Upon Creation of the Trust

2.2.1.1 The revocability means that there is no completed gift upon creation and therefore no gift tax is triggered. Treas. Reg. Sec. 25-2511-2(c).

2.2.1.1.1 The later incapacity of the grantor will probably not make the trust irrevocable thus causing a gift tax event. In Brent v. State Cent. Collection Unit, 311 Md. 626 (1988), a testamentary trust with spendthrift provisions contained a “carve-out” provision whereby a beneficiary could withdraw trust corpus upon reaching set ages. When the beneficiary, in fact, reached those ages, she was incompetent and therefore never exercised the “carve-outs.” The Court of Appeals held that the beneficiary’s incompetency had no bearing on the right to withdraw the funds, her disability merely affected her ability to demand the corpus. See also Gilchrist Est. v. Comm., 340 F.2d 603 (5^th Cir. 1980) where incompetency of holder of power to appoint property did not change includibility under I.R.C. Sec. 2041 and Armata v. U.S., 494 F.2d 1371 (Ct. Cl. 1974) holding power to modify or revoke continues to exist because grantor’s representative could exercise these powers. The IRS has consistently followed this approach. See Rev. Rul. 55-518, 1955-2 CB 384; Rev. Rul. 75-350, 1975-2 CB 366; Rev. Rul. 75-351, 1975-2 CB 368. Generally, a transfer is not a completed gift if the grantor’s creditors can still reach the trust assts. Rev. Rul. 76-103 1976-1 CB 293; Outwin v. Commissioner, 76 T.C. 153 (1981).

2.2.1.1.1.1 Moreover, drafting around this potential issue is relatively painless by providing a testamentary power of appointment to the grantor. Such a power also means that there is no completed gift for federal tax purposes. Treas. Reg. Sec. 25.2511-2(b). It is important, however, if avoiding probate is a goal, not to exercise powers of appointment in the will.

Next Section >