Lesson 21 of 25 · 7 min
Revocable and irrevocable arrangements, mechanically
The label on the document decides nothing. The powers that were kept decide almost everything.
The words revocable and irrevocable describe a single underlying fact: whether the person who set the arrangement up kept the power to undo it. Almost everything else follows from that fact rather than from the label.
A transfer is complete when the transferor has given up dominion over what was transferred. Keep the power to revoke, to change the beneficiaries, or to direct the assets, and the transfer is generally incomplete for at least some purposes, which means the assets continue to be treated as the transferor's. Give those powers up and the arrangement is more likely to be treated as a separate holder. Systems differ on which powers matter, and on whether the same answer is reached for income and for transfer purposes — frequently it is not.
Powers whose retention commonly matters:
- The power to revoke the arrangement and take the assets back.
- The power to change who benefits, or in what proportion.
- The power to direct how the assets are invested or borrowed against.
- The power to substitute other assets of equal value for those held.
The consequences are arithmetic rather than cosmetic. Transfer $6,340,000 into an arrangement that distributes $214,000 in a year. Under one treatment the person who set it up reports all $214,000; under another the arrangement or its beneficiaries do. At two assumed characterisations of 37 percent and 19 percent, the figures are $79,180 and $40,660 — $38,520 apart on facts that are identical in every other respect.
Both percentages are assumptions of the example. Which treatment applies depends on the specific powers in the specific document, read against the rules of a specific system, and that reading is work for a qualified adviser rather than for a lesson describing a general shape.
Key terms
- Retained power
- An ability the transferor kept over transferred assets. Its presence, not the name of the document, usually determines who is treated as the owner.
- Completed transfer
- A transfer after which the transferor no longer has dominion over what was transferred. Incomplete transfers tend to be treated as though nothing moved.
- Divergent treatment
- The common situation in which the same arrangement is treated as the transferor's for one purpose and as separate for another.
Worked example
One arrangement, two columns
$6,340,000 transferred into an arrangement that distributes $214,000 in a year. Both percentages below are assumptions of the example.
- Assets transferred
- $6,340,000
- Distributions in the year
- $214,000
- If the transferor is treated as the owner, at an assumed 37 percent
- $79,180
- If the arrangement is treated as separate, at an assumed 19 percent
- $40,660
- Difference on identical facts
- $38,520
The assets, the distributions and the year were the same in both columns. A retained power inside the document decided which one applied.
Check yourself
Two arrangements hold $6,340,000 each and distribute $214,000 each. One document lets the transferor revoke it and the other does not. What distinguishes them mechanically?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.