Grantor’s retained power to reacquire and substitute assets – uses

Drafting a trust so that the grantor retains a power to reacquire the trust’s assets and substitute them with assets of an equivalent value – a power which is exercised in a nonfiduciary capacity and without the consent of anyone in a fiduciary capacity – has several uses:

• The primary use is to have the grantor pay the income tax on income that is earned by the trust. See Grantor’s retained power to reacquire and substitute assets results in a grantor trust.
• This retained power does not cause the trust’s assets to be included in the grantor’s gross estate for purposes of the federal estate tax. Consequently, the grantor can transfer swap assets with an appreciated basis that the grantor owns with trust assets that have a low basis. With this swap, the grantor will own the low-basis assets, and upon the grantor’s death, these assets will get their basis stepped up to fair market value.
• There could also be business or cash-flow reasons for the swap.