Present Interest Annual Exclusion
In order to minimize the paperwork that would be required if people had to report all gifts, such as birthday gifts to their children, Congress determined that a certain value of gifts should be excluded. The annual exclusion amount is adjusted for inflation each year and applies per donor per donee per year.
Educational and Medical Exclusion
There is, in addition to the annual exclusion, an unlimited exclusion for tuition paid directly to an educational institution or medical provider. Sec. 2503(e). Payments qualifying for the educational exclusion are limited to tuition, and do not cover room and board.
Furthermore, there is a gift exclusion for payments to health care providers. Amounts that would be deductible under Sec. 213(d) for medical and dental expenses qualify for the medical gift exclusion. The principal purpose of this exclusion is to allow individuals to make payments for the medical care of children and parents.
Current Income Stream
A person may create a charitable remainder unitrust, an annuity trust or a charitable gift annuity for a child, parent or other person. If the income interest is payable in the current year, then the present value of the income stream for all three of these plans qualifies for the annual gift exclusion. Reg. 25.2503-3. Even if the unitrust is a "net plus makeup" unitrust, the exclusion is available. PLR 8637084. While it is possible that the full income may not be distributed currently, all income that is available will be distributed. This rule also applies to a gift of a limited partnership interest. All income that is currently generated will be distributed to the limited partners and the interest thus qualifies for the present interest annual exclusion. TAM 199944003.
Deferred Payment Gift Annuity - Future Interest
A charitable deferred payment gift annuity is in part a charitable gift and in part a transfer of a future income interest. A deferred payment gift annuity will have a deferral period of one year or greater before the income stream commences. Since the annuity is not assignable, except to the issuing charity, it is not an asset that can be converted directly into cash. Thus, the deferred annuity does not qualify for the annual exclusion. Reg. 25.2503-3(b).
Gifts to Minors
Two options exist for making gifts to children, grandchildren or other minors using the gift exclusion. A transfer that qualifies under the Uniform Transfers to Minors Act (UTMA) will qualify for the gift exclusion. Under the UTMA, the transfer is made to a custodian for the benefit of a minor. If the parent is appointed custodian and passes away before the beneficiary becomes an adult, then the assets will be includable in the estate of the parent/custodian.
A second option is commonly referred to as a Sec. 2503(c) trust. This trust qualifies for the annual exclusion if principal and income may be used to benefit the minor beneficiary prior to age 21. At age 21, the principal and income pass to the beneficiary. If he or she passes away prior to that date, the assets are distributed to his or her estate. Some states have lowered the required age for distribution from 21 to 18. See Rev. Rul.73-287.
State Tuition 529 Plans
Nearly all states now have a qualified state tuition plan. Sec. 529(c). Contributions to the plan qualify for the annual exclusion. The income grows tax-free in the plan and may be distributed tax-free to a student for qualified educational expenses.
It is also possible to make one contribution and use up to five annual exclusions.
Crummey and Cristofani Powers
Donors may wish to use annual exclusions when making gifts to an irrevocable trust. Commonly, a gift is made to the irrevocable trust and the income beneficiaries are allowed a period of 30 to 45 days to demand payment of the sum to themselves. After the lapse of the "Crummey" power, the trustee may then use the funds to purchase insurance or for other trust investments. So long as each beneficiary receives a Crummey notice letter and has a reasonable time to withdraw the funds, the gift is a present interest. Rev. Rul.80-261.
Normally, annual exclusions equal the number of donors times the number of donees, commonly the donors' children. However, in order to make additional exclusions available, it is permissible to use grandchildren or others with contingent interests. See Estate of Cristofani v. Commissioner. The Tax Court decision in Cristofani regarding cotingent beneficiaries should be distinguished from a beneficiary that has no interest whatsoever in the trust. So long as there is a contingent interest, the Crummey power should be upheld. Some attorneys choose to transfer a one or two percent vested interest in the trust in addition to the contingent interest when using the Cristofani power.
