Gifts of Present Interest
Under Internal Revenue Service (IRS) regulations, the annual gift exclusion applies only to gifts of what is called a "present interest." Thus, the person or institution who receives the gift must have the immediate right to use it and obtains full control. By contrast, a gift that someone may only use in the future, does not qualify for the annual exclusion. These are called gifts of "future interest."
Example: Joe gives $10,000 outright to his friend Bob, and places another $10,000 in an irrevocable trust to benefit his friend Larry. Larry, age 31, can use principal from the trust only when he turns 35. The gift to Bob is a gift of a present interest, because Bob gets the money now. The gift to the trust for Larry is a gift of a future interest, because he has no right to the money when Joe gives it. So, gift tax is assessed against the $10,000 Joe gives to the trust.
Also, a gift made to a minor may qualify for the annual exclusion (even though the minor doesn't have full present control of the gift) if three conditions are met:
- The gift must be retained in trust or an UTMA account, for the minor's benefit.
- The remainder of the gift must go outright to the child upon reaching the age of 21.
- If the child dies before reaching the age of 21, the remainder must be paid to his or her estate.
Gifts No Non-citizen Spouses
For spouses who are both U.S. citizens, the gift tax isn't an issue because there is an unlimited marital deduction for gifts to a spouse who is a U.S. citizen. Gifts to a spouse who is not a U.S. citizen (also called an alien spouse), does not qualify for an unlimited marital deduction. Instead, an annually set permissible amount beyond $130,000 may be given in a year to the non-citizen spouse free of gift tax. Refer to the IRS for yearly amounts.
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