The Step-Transaction Doctrine and the Case of Smaldino

Legacy Planning, Once Removed

Because each donor is treated as a separate party for tax and other purposes, donors often involve others in making gifts. For example, a donor might transfer assets to his or her spouse, so the spouse actually makes the gift for tax purposes. These transfers might be especially important, given the possible “sunset” of current gift, estate and GST tax exemptions at the end of 2025.

However, the manner and timing of those transfers should be carefully structured so the transaction is respected. In some cases, the various steps of a transaction can be collapsed, so they are treated as a single transaction — with disastrous results. This episode reviews pitfalls for clients who seek to engage in this kind of planning, and considers the cautionary tale of Smaldino, a recent Tax Court case.