The lesson from the five cases discussed in the section of this e-Book entitled, “State Court Recent Jurisprudence”, is that failure to draft in anticipation of exercise is now a reasonably foreseeable risk of harm, for which scriveners must address or face exposure for a malpractice claim.

Since 2015, we have had five public decisions of which author and attorney Paul Hood is aware involving the attempted exercise of the Swap Power where the trustee of the grantor trust resisted, causing the matter to wind up in a courtroom and ultimately in the various reporters, whether instigated by the trustee or by the grantor.  The number of reported decisions concerning the Swap Power in this brief period of time signals problems that many practitioners don’t point out to clients often enough, especially given that the Swap Power is one of the few IDGT powers that one can expect to exercise, particularly for basis harvesting purposes.

This e-Book will review the five reported decisions and explore the practical meaning of exercise of the Swap Power and the aftermath. After a brief review of some common situations where exercise of the Swap Power may be advisable or beneficial, Mr. Hood will review the statutory language of IRC Sec. 675(4)(C), briefly explore the recent public rulings involving the Swap Power, consider a panoply of perplexing problems around the exercise of a Swap Power, and give drafting suggestions. The Appendix contains an annotated Swap Power.

TABLE OF CONTENTS

• Introduction
• Common Situations of Exercise of the Swap Power
• History and Statutory Construction
• History of Grantor Trust Rules
• In the Beginning…
• First Grantor Trust Rules Arrive on the Scene
• Thanks for Nothing, Supreme Court!
• Clifford Regulations Restore Order Somewhat, but Congress Finally Acts
• What Does “Reacquire” Mean?
• What does the term “equivalent value” mean?
• State Court Recent Jurisprudence:
  • In re Matter of Condiotti
  • In re Dino Rigoni Intentional Grantor Trust for the Benefit of Christopher Rajzer
  • Benson v. Rosenthal
  • Schinazi v. Eden
  • Manatt v. Manatt.1
• A Panoply of Swap Power Imponderables
  • The Trustee’s Defender v. Guardian Roles
  • The Words of the Swap Power Matter
  • Proper Standard of Value
• Differences Between Current IRC Sec. 675(4)(C) and Its Counterpart in the Clifford Regulations:
  • Exercise by the Grantor
  • Caveat from Howard Zaritsky
  • Adverse Party
  • Non-Adverse Party
  • Beneficiary
  • The Trustee
• The Grantor Pros and Cons
• The Grantor’s Spouse Pros and Cons
• Third-Party Pros and Cons
• Can a Promissory Note Be Substituted in for Hard Assets and Be Considered Equivalent Value?
• Does the Trustee of a Grantor Trust Where the Grantor Has Exercised a Swap Power Have to Go to Court in All Situations?
• Does the Scrivener Have Some Possible Exposure to the Beneficiaries of the Trust if that Exercise of the Swap Power Damages the Trust Value or is Incomplete in Any Material Way?
• Is it Possible for a Trust Asset to Be So Unique that Nothing Sought to be Swapped in Will Be of Equivalent Value?
• What Does the Phrase “Equivalent Value” Mean and Can Equivalent Value Ever Be Supplied by Promissory Notes?
• Can Non-Voting Stock or an Assignee Interest Ever Be Considered Equivalent Value to Voting or Full Interests?
• Third-Party Holders of the Swap Power.
• Can the Swap Power Be Conditioned on Meeting Certain Conditions?
• Toggling the Swap Power On and Off
• Uses of the Swap Power
• A Caveat About Asset Protection Ramifications on the Swap Power
• Checklist of Items to include in a Swap Power clause
• Why Wouldn’t You Want a Third Party to Hold A Swap Power?
• Burning Questions, Do’s and Don’ts for Crafting Swap Powers
• Does Exercise of The Swap Power Require Simultaneous Substitution of Property of Equivalent Value?
• Query: Does the Equivalent Value Require or in Any Way Mandate that the Swapped in Assets Be Similar in Nature or Quality to the Swapped Out Assets? Are Promissory Notes Permissible Assets to Swap into a Grantor Trust for Hard Assets?
• Multiple Simultaneous Holders of the Swap Power
• Conclusion
• Appendix
  • Five Cases Involving Attempted Exercises of Swap Powers
  • Annotated Swap Power Provision