Timing is one of the most important elements of the doctrine: The more separation between the creation of the two trusts, the better, because they are not interrelated. That is why it is important to create the first trust as soon as possible this year and then create a second, if desired, at a later time.
Another element of the reciprocal trust doctrine involves differing terms and powers within the trust, such as whether one beneficiary spouse has a lifetime special power of appointment while the beneficiary spouse in the other trust does not.
In a 1983 Tax Court case, Estate of Levy v. Commissioner, the two trusts were nearly identical with the same beneficiaries and asset funding on the same date, but one trust granted a lifetime special power of appointment for the spouse, and the other did not. The court ultimately ruled that the reciprocal trust doctrine did not apply.
Additional elements of the doctrine include whether the trusts have the same trustees, secondary beneficiaries and distribution standards. For example, one could use the health, education, maintenance and support standard, which allows the spouse to be both the trustee and the beneficiary. The other could require the trustee to be independent of the family (having different trustees and distribution standards go hand in hand).
Finally, whether the trusts have different assets is another element of the reciprocal trust doctrine. For example, one spouse could give real estate, cash and securities to one trust, while the other spouse could give their business interest to the other trust. The exact assets at play are not as important as the fact that each spouse gives something different. Arranging asset ownership in an effective manner can require additional time.
In conclusion, families with assets in excess of $14 million should take initial steps this year to lock in the estate tax exemption under the 2017 tax overhaul. They have a range of options — and limitations under the reciprocal trust doctrine — to consider. Partnering with an experienced estate planning attorney can be helpful as they sort through the best strategies.
Jeff Morris, a partner at Parker Poe in Charlotte, North Carolina, is a North Carolina State Bar board-certified specialist in estate planning and probate law.
