1. Gift Tax Annual Exclusion
Gifts are not taxable income.
The only tax gifts are subject to is the gift tax
The annual exclusion is the amount that can be gifted from each donor to each donee each year free of adverse gift tax consequences.
This amount changes from time to time
$14,000 as of 2013
Increases in increments of $1,000 every few years, to keep up with inflation

2. Gift Tax Annual Exclusion – Gift Splitting
Two spouses can each use their annual exclusion to give the same donee a gift of twice the annual exclusion amount OR
One spouse can give the gift and the spouses can elect to “split” their gifts and thus double the annual exclusion
To do this, the other spouse must consent to the gift split by signing where appropriate on the Form 709 – Federal Gift Tax Return
(Without gift splitting, if you just give less than the annual exclusion amount to each beneficiary, you don’t have to file a gift tax return)

3. Lifetime Gift Tax Exemption Amount
This applies to gifts that are not covered by the annual exclusion
Currently the amount is $5,250,000 for each person
Each gift not covered by the annual exclusion reduces the person’s lifetime exclusion until it is zero
Any gifts beyond the lifetime exemption amount is subject to gift tax
Dovetails with the estate tax
Thus, using up gift tax lifetime exemption amount also simultaneously uses up estate tax exemption amount

4. Gift Tax Marital Deduction
Gifts to spouses who are U.S. citizens are not subject to gift tax.
Gifts to non-citizens are subject to gift tax, but get a much higher annual exclusion than gifts to third parties
If a spouse is not a U.S. citizen, the gift can be made to a “qualified domestic trust” (“QDOT”) and be eligible for the marital deduction
Gifts of a “Qualified Terminable Interest in Property” (“QTIP”) are eligible for the marital deduction even if the gift is not given outright to the surviving Spouse.

5. QTIP Requirements
A QTIP can be in the form of any transfer, but is most common in the form of a trust.
The requirements of a QTIP are:
All of the income must be payable to the spouse, at least annually
The spouse has the right to demand that trust property be used in a manner that produces income
There can be no beneficiary of any kind during the lifetime of the spouse other than the spouse
Upon the spouse’s death, any remaining income must be paid to the spouse’s estate
The remainder beneficiary of a QTIP can be anyone chosen by the initial donor
This is the key reason to use a QTIP rather than an outright distribution

6. Gift Tax Charitable Deduction
Gifts to charities or other organizations with 501(c) tax exempt status are not subject to gift tax.
Gifts to trusts can also be exempt from gift tax if the trust:
Has the status as a charitable entity in its own right; or
Can only distribute assets to charitable organizations
Gifts to “split interest” trusts are subject to gift tax, except as discussed in Chapter 12.

7. Completed Gifts Only “completed gifts” are subject to gift tax.
Generally, a completed gift means a gift that removes the asset from the taxable estate of the grantor.
§2511(c), which provided that any gift to a non-grantor trust is a completed gift and subject to gift tax Though, under current rules, was repealed as of Jan. 1, 2013.
So, to avoid making a completed gift to a trust, the trust should be structured so that the assets in the trust remain as part of the taxable estate of the grantor.

8. Making an Incomplete Gift to a Trust
One simple way to make an incomplete gift is to allow the grantor control over the ultimate disposition of the estate assets (under § 2038).
This should be done in the form of a “special” or “limited” power of appointment.
A limited power is one that cannot be exercised in favor of the grantor, his estate or his creditors
If the grantor has a general power of appointment, the assets would be considered hers for many other legal purposes
This power may be exercisable upon the death of the grantor or during the lifetime of the grantor.
But watch out for adverse consequences of making the power exercisable during lifetime
Such as causing the trust to be considered a grantor trust…

9. Annual Exclusion – the “Present Interest” Requirement
A gift is only allowed the ($14,000 per recipient) annual exclusion if it is a gift of a “present interest” to a person.
A gift of a “future interest” is taxable and uses the lifetime exemption amount of the grantor from the first dollar of the gift.
Outright gifts are almost always gifts of present interests.
Gifts to trusts are considered gifts of future interests because the beneficiaries are not receiving their gifts outright until some future date.

10. “Crummey” Rights of Withdrawal
In a landmark 1968 case, Crummey v. Commissioner, the 9th Circuit ruled that a gift to a trust is a gift of a present interest if a trust beneficiary has the right to withdraw the contribution.
Even if only for a limited period of time
General rules regarding withdrawal powers:
They should last for a reasonable period of time
E.g., 30 days
The recipient must be notified of the right of withdrawal
They should be limited to the lesser of
The beneficiary’s share of the gift; and
The maximum annual exclusion amount
With a proper withdrawal power established, the gift is considered a present interest to the withdrawal power holder.

11. “Crummey” Withdrawal Powers (cont.)
Only a person who is otherwise a beneficiary of the trust should hold a withdrawal power
It’s pretty clear that a non-beneficiary should not hold a Crummey power
It’s unclear if a contingent beneficiary should hold a power
The trustee should send notifications to the recipients (or guardians of minor recipients) of the withdrawal power each year
If possible, the holders of the rights of withdrawal should sign an acknowledgment form and return it to the trustee
All of these should be kept as part of the trust’s records

12. Lapse of the Right of Withdrawal
The rights of withdrawal only need to last 30 days or so
However, allowing the power to lapse can be considered a gift back to the trust
Allowing a withdrawal power to lapse is NOT considered a gift to a trust if the lapsed power is less than
5% of the trust assets or $5,000 (whichever is greater)
So, the trust may state that the withdrawal power lapses to the extent of 5% or $5,000 per year
The remaining part of the withdrawal power that does not lapse each year carries over to the next year
The amount of withdrawal power that sticks around from year to hear is called a “hanging” power of withdrawal