How does an equivalent-value trust swap work?

How the swap works

A swap exchanges trust property for property of equivalent value. A substitution power gives its holder a right to reacquire trust property by substituting other property of equivalent value. Practitioners say the trustee must ensure the values are equivalent and describes documenting the value of transferred assets for each swap transaction. The valuation record concerns the assets transferred in the particular transaction.

Beneficiary interests set a limit

A substitution power cannot be exercised in a way that shifts benefits among trust beneficiaries. Official guidance states that restriction. Practitioners describe equivalent value and the restriction on shifting beneficiary benefits as conditions relevant to the trustee's fiduciary duty when a swap power is exercised. The restriction concerns the interests of the trust beneficiaries.

Who holds the power matters

A nontrustee's capacity is a factual question. Trust and estate practitioners describe whether a nontrustee holds the swap power in a nonfiduciary capacity as depending on the trust terms and the circumstances of creation and administration. Official guidance describes possible estate inclusion treatment for a substitution power exercised in a nonfiduciary capacity when the trustee ensures equivalent value and the power cannot shift beneficiary benefits. The stated conditions concern the trustee's role and the effect on beneficiaries.

Closely held stock has a specific inclusion issue

Retained voting rights can affect estate inclusion. Practitioners state that if a settlor retains voting rights in closely held stock transferred to the trust, the settlor's taxable estate would include the assets received in the swap plus the stock under Section 2036(b).