Reciprocal Trust Doctrine

About Reciprocal Trust Doctrine:

The Reciprocal Trust (cross-trust) Doctrine is a judicial concept that switches grantors of trusts in order to prevent tax avoidance.

Example of Reciprocal Trust Doctrine:

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Harriet creates a trust for the benefit of Carl, and Carl sets up a trust of equal value for Harriet. Under the terms of Harriet's trust, any income is paid to Carl for life, with the remainder to his children. Similarly, the trust created by Carl provides for income to Harriet for life, with the remainder to her children.

This strategy is not a valid tax-planning technique, even though technically neither grantor has retained a life estate. The courts use the reciprocal trust doctrine to switch the grantors of trusts. Each grantor is treated as if he or she has created a trust under which the grantor retains a life interest, and the trust assets are therefore included in the grantor's gross estate under Former IRC (check if this IRC provision is current here) §2036 as a retained life estate.