The federal government imposes a tax on gifts. However, Congress has permitted donors to give a small amount to each beneficiary of their choosing before facing the federal gift tax. This amount is known as the annual exclusion amount, which for 2023 is $17,000 per beneficiary.

Counting to $17,000

The value of all gifts made during the year to a single beneficiary count towards the donor’s $17,000 annual exclusion, no matter what their form. Thus, if you give your child a $10,000 automobile, you have used $10,000 of your annual exclusion and have $7,000 left to give that child within the annual exclusion amount.

Special rules apply to married couples. Two spouses can “split” a gift to a single beneficiary and treat it as if one-half of the total was made by each spouse, no matter which spouse actually made the gift. This technique allows one spouse to make gifts using both spouses’ annual exclusions, for a total gift of $34,000. To qualify for gift splitting, the spouses must file federal gift tax returns signed by both spouses consenting to the split, even if a return would not otherwise be necessary were each to give $17,000 individually.

Gifts at Year-End Can Be Tricky

Your gift must be “complete” by year-end. If making a gift of cash by check close to the end of the calendar year, the check should be cashed before December 31. The gift will not be complete during the time you can stop payment on your check. It is best not to create uncertainty. If making a cash gift right at the end of the year, to avoid any question as to when the gift is complete, consider using a certified check, bank check or, perhaps, a prepaid gift card.

Not All Gifts Qualify for the Annual Exclusion

A gift must be of a “present interest in property” to qualify for this exclusion from the gift tax. These are gifts that the beneficiary can access and use immediately.

A gift in trust that benefits the beneficiary only if a trustee makes a distribution from the trust cannot be readily accessed and is not a present interest in property.

Nevertheless, some gifts in trusts can qualify for the annual exclusion, as described below.

Trust Gifts Which Qualify for the Annual Exclusion

  • Minor’s Trust under Section 2503(c): Gifts to a minor’s trusts created for a beneficiary under the age of 21 pursuant to Internal Revenue Code §2503(c) will qualify for the annual exclusion. To qualify as a §2503(c) minor’s trust, prior to the beneficiary attaining age 21, distributions may be made only to the beneficiary, the beneficiary must be able to take all property from the trust at age 21, and if the beneficiary dies before attaining age 21, the value of the trust property must be included in the beneficiary’s gross estate either by being paid to the beneficiary’s estate or pursuant to a general power of appointment held by the beneficiary. 
  • “Crummey” Trust: Gifts to a so-called “Crummey” Trust, that allows the beneficiary (or an adult acting on a minor beneficiary’s behalf) to withdraw a gift to the trust for a limited time after the gift is made, will also qualify for the annual exclusion. Sometimes, depending on the value of the trust, the lapse of the beneficiary’s power to withdraw property from the trust could cause the beneficiary (even if the beneficiary is a minor) to make a taxable gift. Accordingly, care should be used when deciding when and how much of a beneficiary’s withdrawal right should lapse in any one year.

Grandchildren are Special

Gifts to grandchildren and more remote descendants could also cause the imposition of a generation-skipping transfer tax (GSTT). This is an additional tax imposed on gifts made to persons two or more generations below the transferor.

Outright gifts to a grandchild or more remote descendant up to the annual exclusion amount are nontaxable gifts and are generally not subject to the GSTT.

Gifts made to a trust for a grandchild do not qualify for this treatment unless the trust is for a grandchild or more remote descendant and during the life of such beneficiary, no portion of the corpus or income of the trust may be distributed to, or for the benefit of, any person other than the beneficiary, and if the trust does not terminate before the beneficiary dies, the assets of such trust will be includable in the beneficiary’s gross estate.

Seek Assistance

Always remember to consult your attorney and financial advisors when making gifts or creating trusts.