Legal Memorandum: Application of Gift Tax Exclusion

Issue: Does the gift tax exclusion apply to gifts of future interest in property for federal estate tax purposes?

The $13,000 gift tax exclusion does not apply to gifts of future interest in property (the $13,000 gift tax exclusion amount is the $10,000 statutory figure adjusted for inflation).  I.R.C. § 2503(b)(1)-(2).  A gift of a future interest arises when possession or enjoyment of the property is postponed until some future date or time.  If a beneficiary receives an unrestricted right to the immediate use, possession, or enjoyment of the property, it is a present interest, and the gift tax exclusion shall apply to such transfer.  See Treas. Reg. § 20.2503-3(b). 

Generally, a gift to an irrevocable trust in which the trust beneficiary’s use, possession, or enjoyment of the gifted property is deferred until some future date is treated as a “future interest” and does not qualify for gift tax exclusion.  Treas. Reg. § 20.2503-3(c), Example (1).  However, demand trusts or Crummey trusts are exceptions to such rule.  In a Crummey trust, the beneficiary has the right to demand an immediate distribution of the contributed gift within a limited period of time.  See, e.g., Crummey v. Comm’r, 397 F.2d 82 (9th Cir. 1968); Rev. Rul. 73-405, 1973-2 CB 321.  If a trust provides for a right to demand an immediate distribution, the gift to the trust is treated as a present interest even if the beneficiary doesn’t withdraw such amount and loses the right to withdraw it after some period time.  Id.

To constitute a present interest, the beneficiary with the demand right must have a real opportunity […]