Power to Substitute & End of Year Planning

By:  David R. Schoenhaar, Esq.*

If you are currently planning for clients to use the historically high gift tax exemption amount before the end of the year, you are becoming acutely aware that time is running out. Whether it is the appraisal companies refusing to take new business or the closing in on longer transfer timeframes needed for more complex assets, the opportunity to transfer assets is coming to a close.

For clients in this position, there may be a solution to "buy some time." The power to substitute property of an equivalent value by the Grantor pursuant to Section 675(4)(c) of the Code, that is so commonly included in trusts to achieve grantor trust status, can be used to achieve end of year planning. This provision can be extremely helpful for those who have easily transferable assets (cash or marketable securities) that can be used to fund a gifting trust now and later substituted with more complex assets that are better suited for gifting purposes but are not able to be transferred in 2012. Given this additional benefit, planners who are drafting grantor trusts should consider including a power to substitute to safeguard against a situation where assets can not be transferred before the end of the year.

*David R. Schoenhaar, Esq., is a senior associate at Ruskin Moscou Faltischek, P.C. and is a member of the firm's Trust and Estates Planning and Litigation Department.

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