Many estate planning tools are well-known by practitioners and have names that are universally recognized: A-B Trusts, Crummey Trusts, GRATs, CRTs, etc. To our knowledge, the Family Bank Trust is in use by only a handful of practitioners nationwide, and is known by different names such as the BERT® Trust (by the originators of the strategy, Cecil Smith in Memphis, TN and Carol Gonnella in Jackson, WY) and "Sow & Reap" Trust, which is what we named this strategy when we first started using it and teaching it to colleagues.

If you are familiar with Irrevocable Life Insurance Trusts (aka "Crummey Trusts") you will quickly understand the Family Bank Trust. But for those who are not, here is a quick primer.

In 1968, the United States Supreme Court approved Irrevocable Life Insurance Trusts in a Landmark Case, Crummey v. Commissioner. Normally, life insurance proceeds are subject to federal estate tax, but if the insurance is owned by a properly drafted and administered Crummey trust, it is not includable in your estate for estate tax purposes. It works like this: (1) Taxpayer creates a trust, designed to purchase life insurance. for the benefit of his or her children. (2) Taxpayer chooses a trustee to administer the trust. (3) Each year, the taxpayer sends a payment, equal to or a little greater than the annual insurance premium (usually an amount that does not exceed the $13,000 per donor per donee annual gift tax exclusion), to the trustee. (4) The trust requires the trustee to notify the children that a gift has been made to the trust, and that they have the right to claim it. (5) They are educated to understand that claiming the gift would be less advantageous than not claiming it, so they send a letter back to the Trustee that acknowledges, but does not claim, the gift. (6) The trustee then uses the funds to pay the life insurance premium. (7) This paper-shuffling process is faithfully repeated each year in which premiums must be paid. (8) At the death of the insured taxpayer, the funds pass to the children according to the terms of the trust, free of federal estate tax.

This paper shuffling may seem rather silly--form over substance, perhaps--but it has been blessed by the Supreme Court and in use for more than 40 years.

With a Family Bank Trust, one spouse creates a trust naming the other spouse as beneficiary...and maybe even trustee. The donor spouse makes annual gifts to the trustee, documenting it in the same way as in a Crummey Trust. The beneficiary spouse acknowledges the gift in the same way as in a Crummey Trust. When the time for claiming the gift has run (usually 30 days), the trustee transfers the funds (or stock or property or business interests) to the Family Bank Trust, where, as a properly drawn irrevocable trust, it is exempt from claims of creditors and is excluded from the taxable estate of the donor spouse. If it has been properly structured, taxes are paid by the donor spouse from other resources, not from the Family Bank Trust.

Because the trust is not paying its own taxes, it compounds as though there were no taxes, which is to say much faster than other assets which are not protected by the Family Bank Trust.

It is possible for each spouse to create a trust for the other spouse, and it is possible for the creator spouse to become a beneficiary of the trust they create. In both instances, the drafting is tricky and should be attempted only by experts who understand the esoteric machinations and interplay of the sometimes-conflicting income tax and estate tax laws as they apply to trusts.

By IRS rule, the contributions can be only $5,000 per year unless the donor spouse chooses to use up to $260,000 of his or her $1 million lifetime gifting exclusion to "turbocharge" the trust and allow contributions each year of up to $13,000 per donor per donee (which increases by $1,000 periodically, adjusted for inflation). Through the use of more complex "discount" strategies, it is possible to increase the actual value of the initial and annual contributions, so that over a lifetime, it is possible for the protected, tax exempt amount to grow to $10 million or more, yet be fully accessible to the beneficiary spouse.

This is a terrific strategy for young physicians starting practices and families, allowing the growth of tax-and-creditor-protected wealth. It is equally powerful for wealthy physicians who have assets that exceed (or with growth, are projected to exceed) the estate tax exemption and/or who are concerned about malpractice or other liability. It may also be applicable to physicians' wealthy parents who are no longer insurable, or to non-married couples who do not enjoy the benefit of the unlimited marital exclusion.

Our office has done dozens of these trusts, and we know other specialist practitioners around the country to whom we can make referrals and who are equally experienced in the design and implementation of these unique and powerful trusts.