Beware of the “reciprocal trust” doctrine

If you and your spouse have similar irrevocable trusts for each other’s benefit, you might be subject to the “reciprocal trust” doctrine. It prohibits tax avoidance through trusts that are interrelated and place both grantors in the same economic position as if they’d each created trusts naming themselves as life beneficiaries. There are many ways to avoid invoking the doctrine and triggering unintended tax consequences, but essentially the goal is to vary factors related to each trust, such as the trust assets, terms, trustees, beneficiaries or creation dates, so that the two trusts aren’t deemed “substantially similar” by the IRS. Contact us to learn more.