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How swap powers impact estate planning options

On Behalf of | Dec 13, 2015 | Estate Planning |

Quite a few New Jersey families make use of various types of trusts in their estate planning approach. Trusts can be powerful estate planning tools for preserving wealth and passing down an inheritance to loved ones. There are a number of aspects of trusts that many fail to recognize, however, which can lead to a scenario in which these tools are not used to their highest potential.

An example lies in the swap powers of trusts. Swap powers pertain to irrevocable trusts, and they can be structured in such a way as to be classified as “grantor trusts” for the purpose of income taxation. The grantor can then be taxed on any income earned by the trust.

This allows the assets in a trust to grow at a faster rate, because they are not burdened by taxes. When the grantor does pay taxes on the assets inside of the trust, he or she is basically reducing the amount of money that can be taxed in the future. In a nutshell, the assets are allowed to appreciate quickly with less of a tax burden than would have occurred outside of the protection of the irrevocable trust.

The grantor also has the right to “swap” personal assets for assets that are held within the trust. This means that assets such as cash can be swapped for assets that have appreciated with less tax. Once the grantor passes away, assets that were removed from the trust will be given a full step-up in the appropriate income tax basis. The end result is a significant savings in capital gains tax.

Swap powers play an important role within irrevocable trusts, but many in New Jersey are uncertain how to best leverage those powers. For many, working with a financial planner and estate attorney can result in a strategy to use swap powers to their fullest potential. This can make a world of difference in the eventual outcome, and it is an estate planning issue that is well worth investigation for anyone who is concerned about minimizing estate tax obligations.

Source: nasdaq.com, “Advisors: Harness the Power of the Swap”, Dec. 2, 2015