The IRS looked at these transactions and determined that the result of the gift from the married couples was no different than if they had made the gifts to their own children rather than to the their nieces and nephews. The taxpayers, and the representatives who had advised them, believed the IRS was wrong and took the case to tax court. Basically the Reciprocal Trust Doctrine says that if two people create identical trusts for the benefit of the other, the trust is basically ignored. The current case is significant in that it is the first time the Reciprocal Trust Doctrine has been applied in a gifting situation. This new ruling makes interfamily gifting more complex.
Proper planning is required to help minimize gift and estate taxes.
This is a new case and it is still unclear how it will evolve. If history is any indicator, we can expect the IRS the use this case to further restrict gifts that it considers interrelated. As with most areas of taxation the gift and estate tax area is complex and constantly evolving. If you would like to learn more about this case or have any other tax question please contact our tax department. Links to external sites are provided as a courtesy.