The NYT has this interesting article profiling Jonathan Blattmachr and his wife, Betsy, and their estate planning strategy. Blattmachr is one of the nation’s most preeminent estate planning attorneys and a tax law expert than many attorneys, accountants, and others read for advice on navigating the complex labyrinth that is the IRS Code. He’s a classic example of the Type A personality who immerses himself in the materials of a particular topic and then declares with certainty (often to others’ bemusement) that he’s absolutely certain if you do X, Y will occur. Most attorneys, accountants, and other estate planning professionals are smart, analytical, and risk averse; Blattmachr is the proverbial smartest guy in the room who believes (and often convinces others) that he’s devised a solution so ingenious that despite the critics’ howls and groans, it’s flawless and incontrovertible. And he’s usually right: his work holds up well under IRS attack.
Estate planning attorneys across America have been encouraging affluent clients to max out their $5.12 million lifetime gift tax exemptions before Dec 31, 2012 (since the exemption falls back to $1 million on Jan 1, 2013) (pardon the cheesy title, but clients are well-advised to take advantage of these historically high exemptions). And because of a(n IRS approved) technique called “split gifting,” if you’re married, your $5.12 million individual exemption is actually $10.24 million. So far so good, right? Well, as the article mentions, there’s an old tax law ghoul called the reciprocal trust doctrine. And the reciprocal trust doctrine says if a husband and wife set up trusts with identical terms that make each other beneficiaries and trustees, the IRS can step in and pull the plug, and tell the couple that their clever estate planning is undone and the $10.24 million gift (designed to remove assets from their estates) is now back in their estates (and taxable at the 45%+ estate tax rate). The reciprocal trust doctrine prohibits the wink wink nod nod, quid pro quo, I’ll scratch your back if you scratch mine estate planning strategy in irrevocable trusts. But there are ways around the reciprocal trust doctrine.
To avoid the reciprocal trust doctrine, attorneys vary the terms of the trusts. We (1) set them up at different times, (2) name different beneficiaries, (3) name different trustees, and otherwise vary the terms to make them materially different.
If you’re looking to set up trusts for your family and descendants, sell or transition your small business, or do other estate planning before 2013, time’s running out. Our firm, Johnson Law KC LLC, has experience advising individuals, families, small business owners, and entrepreneurs in all facets of estate planning – whether simple or complex – and we can handle your other legal needs as well. Give us a call (913-707-9220) or email (firstname.lastname@example.org) if we can be of service to you.
(c) 2012, Stephen M. Johnson, Esq.