With the new Item Override subscreen thingy, if you set it so Link can have 2 swords, you can still trip a flag meant for the higher level sword with the lower level sword.
So, for example:
You set Item Override so that Link has both the wooden and white swords in his inventory.
You then give him both of those swords.
You place flag 80 (White Sword +) on the screen, and slash it with the wooden sword.
You can still trigger the white sword only flag with the wooden sword.
If you then take the white sword out of Link's inventory, it doesn't happen.