The problem the structure solves
Using a lifetime gift exclusion requires giving assets away irrevocably. For most people that is the obstacle, not the tax. The assets are still supporting a life, and a completed gift puts them beyond reach.
The spousal trust addresses this directly. One spouse transfers assets to an irrevocable trust of which the other spouse is a beneficiary. The gift is complete for transfer tax purposes and the assets leave the donor's estate, but the family retains indirect access through distributions to the beneficiary spouse.
The difficulty appears when both spouses want to do it, which is almost always, because each of them has an exclusion to use.
What the doctrine does
If each spouse creates a trust for the other on substantially the same terms, the Supreme Court held in 1969 that the trusts may be uncrossed: each is treated as having created a trust for their own benefit.
The consequence is the loss of the entire objective. The assets are pulled back into the settlors' estates, the transfer tax benefit disappears, and the family is left having given up control of the property for nothing.
How practitioners create genuine difference
The response is to make the two trusts actually different, in ways that are substantive rather than cosmetic. The usual levers:
| Lever | What varying it does |
|---|---|
| Timing | Separating creation and funding by a meaningful interval weakens the inference that the two were a single interrelated plan |
| Beneficiary class | One trust for the spouse and descendants, the other for the spouse alone, or with different remainder provisions, produces genuinely different economic interests |
| Distribution standards | An ascertainable standard in one and fully discretionary distributions in the other change what each beneficiary can actually compel |
| Powers of appointment | Granting a limited power of appointment in one trust and not the other alters who ultimately controls disposition |
| Trustee | Different trustees, and in particular an independent trustee in one, change who decides |
| Funding assets | Different assets, and different amounts, avoid the mirror-image appearance that draws the doctrine |
Practitioners differ on how much difference is enough, and the honest answer is that there is no bright line. What can be said is that varying one item while keeping everything else identical is the weakest version of the exercise, and that differences with no economic content are unlikely to help.
The risks that are not about the doctrine
Two exposures sit outside the tax analysis entirely and account for a large share of the regret.
- 01Divorce. Indirect access runs through the beneficiary spouse. If the marriage ends, the access generally ends with it while the assets remain in a trust the settlor cannot reach. Some trusts define the spouse as the person married to the settlor from time to time, which addresses part of this and introduces questions of its own.
- 02Death of the beneficiary spouse. The same access disappears, and it disappears at the moment the surviving settlor may most need it. The plan should be stress-tested against the first death rather than assuming both spouses survive to the remainder.
- 03Liquidity. If the trusts hold the operating business or the concentrated position, the family may be asset-rich and cash-poor in exactly the years when distributions are constrained by the trustee's duties.
General information only. This article describes law and practice as we understand them at the time of writing. It is not tax, legal, accounting, or investment advice, it does not consider your circumstances, and it does not create an advisor-client or attorney-client relationship. Odyssey Strategic Advisors LLC is not a law firm and is not a CPA firm. Confirm any position with your own tax professional before acting on it. See our disclosures.