Estate Tax Planning and Asset Protection: Beware of the Reciprocal Trust Doctrine

As spouses consider their estate planning and asset protection needs, it’s very important that they take care not to fall into the “reciprocal trust” trap.

A common strategy for protecting assets and reducing a taxable estate is to create an irrevocable trust for the benefit of another person, commonly your spouse.  However, the IRS will disregard reciprocal trusts if the terms leave the grantors in the same economic position.

Here is an illustration of this point:

Husband and Wife each create separate irrevocable trusts.  The wife funds her irrevocable trust with $5 million dollars and names the husband as the beneficiary, with the remainder to their children upon the husband’s death.  The husband also creates a trust and funds it with $5 million dollars and names the wife the beneficiary, with the remainder to their children upon the wife’s death.  The IRS would maintain that these are reciprocal trusts and would treat the grantor as if he or she still owned the property. There would be no estate tax savings to creating the trust.

There are provisions that can be inserted into each of the trusts that will help defeat the reciprocal trust doctrine.  For example, granting the beneficiary of one of the trusts a limited power of appointment will help defeat this doctrine.  The timing of the creation of the trusts is also important.  Staggering trust creation rather than having trusts executed simultaneously can be persuasive.

It is important to work with counsel in establishing the trust terms in such a way as to defeat the reciprocal trust doctrine.  Laidlaw Firm offers free initial consultations.  Please contact us today for further information. 

New York Supplemental or Special Needs Trusts

Supplemental or Special Needs Trusts are a vehicle that can be used for permanently and severely disabled persons so that they can receive an inheritance or a lawsuit award without being disqualified from governmental benefits. In the old days, parents used to have to disinherit a disabled child. Or worse, the inheritance money received by the disabled child could cause that child to lose needed government benefits, including medical care and housing.

SNTs solve this problem by providing that the money in the trust is not to be used for services already being provided by the government but may only be used for supplemental services ad care, above and beyond what government assistance provides. There are two kinds of SNTs: first party - funded with the disabled person's own money -- and third party - funded with the money of another individual, such as a parent or other relative. Third party SNTs are less heavily regulated and of greater benefit to the family, as any money left over at the death of the disabled beneficiary does not need to be paid to the government, but rather passes instead to the next-named beneficiary. First party SNTs have more requirements -- they must be created and funded before the beneficiary turns 65, they may only be created by a parent or grandparent of the disabled person or by a court (unless using a pooled trust -- which will have to be the subject of another blog). Also, in a first party SNT, anything remaining at the death of the beneficiary must be first used to repay the government the cost of expenditures made on behalf of the disabled person.

For help in creating an SNT for yourself or a loved one, please contact Laidlaw Firm at 914-767-0646; mlaidlaw@laidlawfirm.com; http://www.laidlawfirm.com/

Common Mistakes with a Will

When making a Will, people often don't realize that some of their most important assets, like life insurance and retirement accounts, will not pass under the terms of the Will. Instead, they will pass in accordance with "Designated Beneficiary" forms. After you make a change to your Will, especially if you plan to set up trusts for minor children in your will, you need to make sure that your designated beneficiary forms are changed to name the trusts, and not your children, as the beneficiaries. At Laidlaw Firm, we work with clients to assist not only with preparing Wills, but making sure that designated beneficiaries of the non-probate assets (i.e., the assets that won't pass under the Will), match the terms of the Will. Call or email today for help: 914-767-0646; mlaidlaw@laidlawfirm.com