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Gift Tax

  • 892. What is the federal gift tax?

    • The federal gift tax is an excise tax on the right to transfer property during life.1 The donor is generally responsible for paying the gift tax. The payment of the gift tax by the donor is not treated as a gift. The gift tax is a cumulative tax and the tax rates are progressive. Gifts made in prior years are taken into account in computing the tax on gifts made in the current year with the result that later gifts are usually taxed in a higher bracket than earlier gifts (a drop in tax rates could obviate this result). Moreover, the tax is a unified tax; the same tax that is imposed on taxable gifts is imposed on taxable estates. The maximum gift tax rate for 2011 and 2012 was 35 percent. Under the American Taxpayer Relief Act of 2013, the top estate and gift tax rate increased to 40 percent, and the exclusion amount was set at the $5 million level, as indexed for inflation annually to $5.49 million in 2017. The 2017 Tax Act raised the exemption amount to $11.18 million in 2018, $11.4 million in 2019, $11.58 million in 2020, $11.7 million for 2021, $12.06 million for 2022, $12.92 million for 2023 and $13.61 in 2024.2

      A gift tax return (Form 709), if required, must generally be filed by April 15 of the year following the year in which the gift was made. A six-month extension for filing is available. Tax is generally due by April 15, but certain extensions for payment may be available. See Q 915.

      The Federal Gift Tax Worksheet, below, shows the steps for calculating the gift tax. Calculation starts with determining what constitutes a gift for gift tax purposes (see Q 893). In general, gifts include gratuitous transfers of all kinds. Two spouses can elect to have all gifts made by either spouse during the year treated as made one-half by each spouse (Q 904). A qualified disclaimer is not treated as a gift (Q 895).

      Gifts are generally valued at fair market value on the date of the gift (Q 916). Special rules apply for a wide variety of investments and to net gifts (Q 900), and Chapter 14 special valuation rules apply to transfers to family members of certain interests in corporations, partnerships, or trusts (Q 934).

      Several exclusions are available. A $18,000 in 2024 ($17,000 in 2023, $16,000 in 2022, and $15,000 in 2018-20213) annual exclusion is available for present interest gifts on a per donor/donee basis. An unlimited exclusion is available for qualified transfers for educational and medical purposes. See Q 905.

      Several deductions are also available. Unlimited marital (Q 912) and charitable (Q 913) deductions are available for certain transfers to the donor’s spouse and to charities.

      The amount of taxable gifts subject to the federal gift tax equals gifts made during the year reduced by all exclusions and deductions.

      The federal gift tax is imposed on taxable gifts. As discussed above, the federal gift tax rates are generally progressive and the tax is based on cumulative taxable transfers during lifetime. To implement this, the tax is calculated on total taxable gifts, the sum of the taxable gifts made during the year (current taxable gifts) and prior taxable gifts, and the gift tax that would have been payable on prior taxable gifts (using the current tax rates) is then subtracted out. 2010 TRA provided that the amount of the unified credit is computed taking into account the credit for prior years’ gifts using the gift tax rate for the current gift to determine the tentative tax.4 Thus, a donor can make gifts equal to the applicable exemption amount (see above) and prior taxable gifts without incurring a gift tax liability.


      Planning Point: A gift made after August 5, 1997 cannot be revalued if the gift was adequately disclosed on a gift tax return and the gift tax statute of limitations (generally, three years from the date of filing) has passed.5 Consider filing gift tax returns even for non-cash annual exclusion gifts.


      The tentative tax is then reduced by the unified credit (Q 914) to produce gift tax payable.

      Federal Gift Tax Worksheet
      Current Year
      Current Gifts Q 893
      – Annual Exclusions Q 905
      – Qualified Transfers Exclusion Q 905
      – Marital Deduction Q 912
      – Charitable Deduction Q 913
      – Total Reductions
      Current Taxable Gifts
      + Prior Taxable Gifts
      Total Taxable Gifts
      Tax on Total Taxable Gifts Appendix D
      – Tax on Prior Taxable Gifts Appendix D
      Tentative Tax Appendix D
      – Unified Credit Q 914
      Federal Gift Tax

      1.      IRC § 2501.

      2.      American Taxpayer Relief Act of 2012, Pub. Law No. 112-240, § 101; Rev. Proc. 2016-55, The 2017 Tax Act, Pub. Law. No. 115-97, Rev. Proc. 2018-18, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34.

      3.      Rev. Proc. 2018-57, Rev Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34.

      4.      IRC Section 2505(a).

      5.      IRC § 6501(c)(9).

  • 893. Which types of transfers are subject to the federal gift tax?

    • The gift tax applies to a transfer by way of gift whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. For example, a taxable transfer may be effectuated by the creation of a trust; the forgiving of a debt (see Q 897); the assignment of a judgment; the transfer of cash, certificates of deposit, federal, state, municipal, or corporate bonds, or stocks.1

      All transactions whereby property or property rights or interests are gratuitously passed or conferred upon another, regardless of the means or device employed, constitute gifts subject to tax.2 Donative intent on the part of the transferor is not an essential element in the application of the gift tax to the transfer. The application of the tax is based on the objective facts of the transfer and the circumstances under which it is made, rather than on the subjective motives of the donor.3 Generally, if property is transferred gratuitously or for an inadequate consideration, a gift (of the full value of the property transferred or the portion in excess of the consideration given) will be considered a gift.4

      Shareholders of nonparticipating preferred stock in profitable family held corporations have been held to have made gifts to the common stockholders (typically descendants of the preferred shareholder) by waiving payment of dividends or simply by failing to exercise conversion rights or other options available to a preferred stockholder to preserve his position.5 The Tax Court has held that the failure to convert noncumulative preferred stock to cumulative preferred stock did not give rise to a gift, but that thereafter a gift was made each time a dividend would have accumulated. However, the failure to exercise a put option at par plus accumulated dividends plus interest was not treated as a gift of foregone interest.6

      A transaction involving the nonexercise of an option by a son under a cross-purchase buy-sell agreement followed by the sale of the same stock by the father to a third party when the fair market value of the stock was substantially higher than the option price was treated as a gift from the son to the father.7 Also, a father indirectly made a gift to his son to the extent that the fair market value of stock exceeded its redemption price when the father failed to exercise his right under a buy-sell agreement to have a corporation redeem all of the available shares held by his brother-in-law’s estate and the stock passed to the son.8

      With respect to a trust, the grantor/income beneficiary may be treated as making additional gifts of remainder interests in each year that the grantor fails to exercise his right to make nonproductive or underproductive property normally productive.9 A mother made gifts to her children to the extent that the children were paid excessive trustee fees from the marital deduction trust of which the mother was a beneficiary.10 Where a trust was modified to add adopted persons as beneficiaries, the beneficiaries with trust interests prior to the modification were treated as making gifts to the newly added beneficiaries.11


      Planning Point: However, a grantor of a trust does not make a gift to trust beneficiaries by paying the income tax on trust income taxable to the grantor under the grantor trust rules (see Q 797).12 Therefore, trusts that are disregarded for income tax purposes but not for transfer tax purposes can provide a significant opportunity for trust principal to grow without the reduction of tax.


      Letter Ruling 9113009 (withdrawn without comment by TAM 9409018) had ruled that a parent who guaranteed loans to his children made a gift to his children because, without the guarantees, the children could not have obtained the loans or, at the very least, would have paid a higher interest rate.

      The gift tax is imposed only on completed gifts (see Q 894), which is a facts and circumstances analysis.

      Where spouses enter into joint and mutual wills, the surviving spouse may be treated as making a gift of a remainder interest at the other spouse’s death.13

      The transfer of a qualifying income interest for life in qualified terminable interest property for which a marital deduction was allowed (see Q 847, Q 912) will be treated as a transfer of such property for gift tax purposes.14 If a QTIP trust is severed into Trust A and Trust B and the spouse renounces her interest in Trust A, such renunciation will not cause the spouse to be treated as transferring Trust B under IRC Section 2519.15

      The spouse is entitled to collect from the donee the gift tax on the transfer of a QTIP interest. The amount treated as a transfer for gift tax purposes is reduced by the amount of the gift tax the spouse is entitled to recover from the donee. Thus, the transfer is treated as a net gift (see Q 900). The failure of a spouse to exercise the right to recover gift tax from the donee is treated as a transfer of the unrecovered amount to the donee when the right to recover is no longer enforceable. If a written waiver of the right of recovery is executed before the right becomes unenforceable, the transfer of the unrecovered gift tax is treated as made on the later of (1) the date of the waiver, or (2) the date the tax is paid by the transferor. Any delay in exercise of the right of recovery is treated as an interest-free loan (see Q 896) for gift tax purposes.16

      Where a surviving spouse acquires a remainder interest in QTIP marital deduction property in connection with a transfer of property or cash to the holder of the remainder interest, the surviving spouse makes a gift to the remainder person under both IRC Section 2519 (disposition of QTIP interest) and IRC Sections 2511 and 2512 (transfers and valuation of gifts). The amount of the gift is equal to the greater of (1) the value of the remainder interest, or (2) the value of the property or cash transferred to the holder of the remainder interest.17 On the other hand, children would be treated as making a gift if the children transfer their remainder interest in a QTIP marital deduction trust to the surviving spouse.18

      Any subsequent transfer by the donor spouse of an interest in such property is not treated as a transfer for gift tax purposes, unless the transfer occurs after the donee spouse is treated as having transferred such property under IRC Section 2519 or after such property is includable in the donee spouse’s estate under IRC Section 2044 (see Q 824).19 Also, if property for which a QTIP marital deduction was taken is includable in the estate of the spouse who was given the QTIP interest and the estate of such spouse fails to recover from the person receiving the property any estate tax attributable to the QTIP interest being included in such spouse’s estate, such failure is treated as a transfer for gift tax purposes unless (1) such spouse’s will waives the right to recovery, or (2) the beneficiaries cannot compel recovery of the taxes (e.g., where the executor is given discretion to waive the right of recovery in such spouse’s will).20

      The gift tax is not applicable to a transfer for a full and adequate consideration in money or money’s worth, or to ordinary business transactions (i.e., transactions which are bona fide, at arm’s length, and free from any donative intent). A consideration that cannot be reduced to a value in money or money’s worth (such as love and affection, promise of marriage, etc.) is wholly disregarded, and the entire value of the property transferred constitutes the amount of the gift. Similarly, a relinquishment or promised relinquishment of dower or curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the spouse’s property or estate, is not considered to any extent a consideration “in money or money’s worth.”21

      Transfers of property or interests in property made under the terms of a written agreement between spouses in settlement of their marital or property rights are deemed to be for an adequate and full consideration in money or money’s worth and, therefore, exempt from the gift tax (whether or not such agreement is approved by a divorce decree), if the spouses obtain a final decree of divorce from each other within the three-year period beginning on the date one year before the agreement is entered into.22

      For recapture rules applicable where distributions are not timely made in connection with the transfer of an interest in a corporation or partnership which is subject to the Chapter 14 valuation rules, see Q 935. For deemed transfers upon the lapse of certain voting or liquidation rights in a corporation or partnership, see Q 944.

      A gift may be made of foregone interest with respect to interest-free and bargain rate loans (see Q 896).

      A United States citizen or resident who receives a covered gift from certain expatriates may owe gift tax on the transfer.23


      1.      Treas. Reg. § 25.2511-1(a).

      2.      Treas. Reg. § 25.2511-1(c).

      3.      Treas. Reg. § 25.2511-1(g)(1).

      4.      Hollingsworth v. Comm., 86 TC 91 (1986).

      5.      TAMs 8723007, 8726005.

      6.      Snyder v. Comm., 93 TC 529 (1989).

      7.      Let. Rul. 9117035.

      8.      TAM 9315005.

      9.      Let. Rul. 8945006.

      10.     TAM 200014004.

      11.     Let. Rul. 200917004.

      12.     Rev. Rul. 2004-64, 2004-27 IRB 7.

      13.     Grimes v. C.I.R.., 851 F.2d 1005, 88-2 USTC ¶ 13,774 (7th Cir. 1988).

      14.     IRC § 2519.

      15.     Let. Ruls. 200116006, 200122036.

      16.     Treas. Reg. §§ 25.2207A-1(b), 25.2519-1(c)(4).

      17.     Rev. Rul. 98-8, 1998-1 CB 541.

      18.     Let. Rul. 199908033.

      19.     IRC § 2523(f)(5).

      20.     Treas. Reg. § 20.2207A-1(a).

      21.     Treas. Reg. § 25.2512-8.

      22.     IRC § 2516.

      23.     IRC § 2801.

  • 894. When is a gift complete for purposes of the federal gift tax?

    • The gift is complete once the donor parts with dominion and control over the property or interest in the property, leaving him no power to change its disposition, whether for the donor’s own benefit or for the benefit of another.1 In general, a transfer of an interest in a revocable trust is incomplete until the interest becomes irrevocable. However, if the interest becomes irrevocable at the grantor’s death, it will generally be subject to estate tax (see Q 824) rather than to gift tax.

      If a donor delivers a properly endorsed stock certificate to the donee or the donee’s agent, the gift is completed for gift tax purposes on the date of delivery. If the donor delivers the certificate to a bank or broker as his agent, or to the issuing corporation or its transfer agent, for transfer into the name of the donee, the gift is completed on the date the stock is transferred on the books of the corporation.2

      A transfer of a nonstatutory stock option which was not traded on an established market would be treated as a gift to a family member on the later of the following: (1) the transfer; or (2) the time when the donee’s right to exercise the option is no longer conditioned on the performance of services by the transferor.3

      The gratuitous transfer by the maker of a legally binding promissory note is a completed gift (the transfer of a legally unenforceable promissory note is an incomplete gift); if the note is unpaid at the donor’s death, the gift is not treated as an adjusted taxable gift in computing the tentative estate tax (see Q 821), and no deduction is allowable from the gross estate for the promisee’s claim with respect to the note (see Q 847).4

      In the case of a gift by check, the following questions arise: (1) when is the gift complete?; (2) when is the check delivered?; and (3) when is the check cashed? In litigation to date, the courts initially appeared to make a distinction between gifts to charitable donees and gifts to noncharitable donees. In the former scenario, it has been held that at least where there is timely presentment and payment, payment of the check by the bank relates back to the date of delivery for purposes of determining completeness of the gift.5 In the latter scenario, the courts have shown less of a willingness to apply the “relation back” doctrine.

      In Estate of Dillingham v. Commissioner,6 the noncharitable donees did not cash the checks until 35 days after the delivery date – the donor’s death having intervened. The court said that this delay casted doubt as to whether the checks were unconditionally delivered. Since the estate failed to prove unconditional delivery, the court declined to extend the relation back doctrine to the case before it. It then turned to local law to determine whether the decedent had parted with dominion and control upon delivery of the checks. It determined that under applicable local law (Oklahoma), the donor did not part with dominion and control until the checks were cashed.

      However, in Est. of Gagliardi v. Commissioner,7 checks written by a brokerage firm and charged against the decedent’s account prior to decedent’s death were treated as completed gifts to the noncharitable donees, even though some checks were cashed after decedent’s death.

      Also, in Est. of Metzger v. Commissioner,8 the relation-back doctrine was applied to gifts made by check to noncharitable beneficiaries where the taxpayer was able to establish the following: (1) the donor’s intent to make gifts; (2) unconditional delivery of the checks; (3) presentment of the check during the year for which a gift tax annual exclusion was sought and within a reasonable time after issuance; and (4) that there were sufficient funds to pay the checks at all relevant times. In W. H. Braum Family Partnership v. Commissioner,9 the relation back doctrine was not applied where the taxpayer could not establish either (2) or (4). In response to Metzger, the Service issued a revenue ruling providing that a gift by check to a noncharitable beneficiary will be considered complete on the earlier of (1) when the donor has so parted with dominion and control under state law such that the donor can no longer change its disposition, or (2) when the donee deposits the check, cashes the check against available funds, or presents the check for payment if the following conditions are met: (a) the check must be paid by the drawee bank when first presented for payment to the drawee bank; (b) the donor must be alive when the check is paid by the drawee bank; (c) the donor must have intended a gift; (d) delivery of the check by the donor must have been unconditional; (e) the check must be deposited, cashed or presented in the calendar year for which the completed gift tax treatment is sought; and (f) the check must be deposited, cashed, or presented within a reasonable time of issuance.10

      In the case of a gift made to a trust, a gift is incomplete to the extent that the donor retains the power to name new beneficiaries or change the interests of the current beneficiaries.11 The retention by the donor of a limited power of appointment over property transferred to trust during his or her lifetime can cause the gift to trust to be considered incomplete for federal gift tax purposes. The IRS has ruled privately that a limited power of appointment over property transferred to trust can cause the gift to remain incomplete even in a case where the power is exercisable in conjunction with another person. The gift will remain incomplete so long as the donor retains a limited power of appointment that is exercisable by him in conjunction with any person that does not have a substantial adverse interest in the disposition of the trust assets in question.12


      1.      Treas. Reg. § 25.2511-2(b).

      2.      Treas. Reg. § 25.2511-2(h); Rev. Rul. 54-554, 1954-2 CB 317; Rev. Rul. 54-135, 1954-1 CB 205.

      3.      Rev. Rul. 98-21, 1998-1 CB 975.

      4.      Rev. Rul. 84-25, 1984-1 CB 191.

      5.      Est. of Spiegel v. Comm., 12 TC 524 (1942).

      6.      903 F.2d 760, 90-1 USTC ¶ 60,021 (10th Cir. 1990).

      7.      89 TC 1207 (1987).

      8.      38 F.3d 118, 94-2 USTC ¶ 60,179 (4th Cir. 1994), aff’g 100 TC 204 (1993).

      9.      TC Memo 1993-434.

      10.     Rev. Rul. 96-56, 1996-2 CB 161.

      11.     Treas. Reg. § 25.2511-2(c).

      12.     Let. Rul. 201507008.

  • 895. If a person refuses to accept an interest in property (a disclaimer), is he considered to have made a gift of the interest for federal gift tax purposes?

    • Not if he makes a qualified disclaimer. A “qualified disclaimer” is an irrevocable and unqualified refusal to accept an interest in property created in the person disclaiming by a taxable transfer made after 1976. With respect to inter vivos transfers, for the purpose of determining when a timely disclaimer is made (see condition (3) below), a taxable transfer occurs when there is a completed gift for federal gift tax purposes regardless of whether a gift tax is imposed on the completed gift. Thus, gifts qualifying for the gift tax annual exclusion are regarded as taxable transfers for this purpose.1 Furthermore, a disclaimer of a remainder interest in a trust created prior to the enactment of the federal gift tax was subject to the gift tax where the disclaimer was not timely and the disclaimer occurred after enactment of the gift tax.2 In order to effectively disclaim property for transfer tax purposes, a disclaimer of property received from a decedent at death should generally be made within nine months of death rather than within nine months of the probate of the decedent’s will.3

      In general, the disclaimer must satisfy the following conditions: (1) the disclaimer must be irrevocable and unqualified; (2) the disclaimer must be in writing; (3) the writing must be delivered to the transferor of the interest, his legal representative, the holder of the legal title to the property, or the person in possession of the property, not later than nine months after the later of (a) the day on which the transfer creating the interest is made, or (b) the day on which the disclaimant reaches age 21; (4) the disclaimant must not have accepted the interest disclaimed or any of its benefits; and (5) the interest disclaimed must pass either to the spouse of the decedent or to a person other than the disclaimant without any direction on the part of the person making the disclaimer.4 Acts indicative of acceptance include: (1) using the property or the interest in property; (2) accepting dividends, interest, or rents from the property; and (3) directing others to act with respect to the property or interest in property. However, merely taking delivery of title without more does not constitute acceptance.5 A person cannot disclaim a remainder interest in property while retaining a life estate or income interest in the same property.6 Under 2010 TRA, a disclaimant has up to nine months after the enactment of 2010 TRA (12/17/10) to disclaim property passing from a decedent who died between January 1, 2010 and December 16, 2010.

      If a person makes a qualified disclaimer, for purposes of the federal estate, gift, and generation-skipping transfer tax provisions, the disclaimed interest in property is treated as if it had never been transferred to the person making the qualified disclaimer. Instead it is considered as passing directly from the transferor of the property to the person entitled to receive the property as a result of the disclaimer. Accordingly, a person making a qualified disclaimer is not treated as making a gift. Similarly, the value of a decedent’s gross estate for purposes of the federal estate tax does not include the value of property with respect to which the decedent or his executor has made a qualified disclaimer.7

      In the case of a joint tenancy with rights of survivorship or a tenancy by the entirety, the interest which the donee receives upon creation of the joint interest can be disclaimed within nine months of the creation of the interest and the survivorship interest received upon the death of the first joint tenant to die (deemed to be a one-half interest in the property) can be disclaimed within nine months of the death of the first joint tenant to die, without regard to the following: (1) whether either joint tenant can sever unilaterally under local law; (2) the portion of the property attributable to consideration furnished by the disclaimant; or (3) the portion of the property includable in the decedent’s gross estate under IRC Section 2040. However, in the case of a creation of a joint tenancy between spouses or tenancy by the entirety created after July 13, 1988 where the donee spouse is not a U.S. citizen, a surviving spouse can make a disclaimer within nine months of the death of the first spouse to die of any portion of the joint interest that is includable in the decedent’s estate under IRC Section 2040. Also, in the case of a transfer to a joint bank, brokerage, or other investment account (e.g., mutual fund account) where the transferor can unilaterally withdraw amounts contributed by the transferor, the surviving joint tenant may disclaim amounts contributed by the first joint tenant to die within nine months of the death of the first joint tenant to die.8

      For purposes of a qualified disclaimer, the mere act of making a surviving spouse’s statutory election is not to be treated as an acceptance of an interest in the disclaimed property or any of its benefits. However, the disclaimer of a portion of the property subject to the statutory election must be made within nine months of the decedent spouse’s death, rather than within nine months of the surviving spouse’s statutory election.9

      A power with respect to property is treated as an interest in such property.10 The exercise of a power of appointment to any extent by the donee of the power is an acceptance of its benefits.11

      A beneficiary who is under 21 years of age has until nine months after his 21st birthday in which to make a qualified disclaimer of his interest in property. Any actions taken with regard to an interest in property by a beneficiary or a custodian prior to the beneficiary’s 21st birthday will not be an acceptance by the beneficiary of the interest.12 This rule holds true even as to custodianship gifts in states which provide that custodianship ends when the donee reaches an age below 21.13

      It is also important to check applicable state law to make certain that the disclaimer meets the requirements and is effective.


      1.      Treas. Reg. § 25.2518-2(c)(3).

      2.      U.S. v. Irvine, 114 S. Ct. 1473, 94-1 USTC ¶ 60,163 (U.S. 1994).

      3.      Est. of Fleming v. Comm., 974 F.2d 894, 92-2 USTC ¶ 60,113 (7th Cir. 1992).

      4.      IRC § 2518(b); Treas. Reg. § 25.2518-2(a).

      5.      Treas. Reg. § 25.2518-2(d)(1).

      6.      Walshire v. Comm., 288 F.3d 342, 2002-1 USTC ¶ 60,439 (8th Cir. 2002).

      7.      Treas. Reg. § 25.2518-1(b).

      8.      Treas. Reg. § 25.2518-2(c)(4).

      9.      Rev. Rul. 90-45, 1990-1 CB 176.

      10.     IRC § 2518(c)(2).

      11.     Treas. Reg. § 25.2518-2(d)(1); Let. Rul. 8142008.

      12.     Treas. Reg. § 25.2518-2(d)(3).

      13.     Treas. Reg. § 25.2518-2(d)(4), Example 11.

  • 896. Are gifts made of foregone interest or interest-free and bargain rate loans subject to the federal gift tax?

    • An interest-free or low-interest loan within a family or in any other circumstances where the foregone interest is in the nature of a gift results in a gift subject to the federal gift tax. IRC Section 7872 applies in the case of term loans made after June 6, 1984, and demand loans outstanding after that date.

      In general, IRC Section 7872 recharacterizes a below-market loan (an interest-free or low-interest loan) as an arm’s length transaction in which the lender (1) made a loan to the borrower in exchange for a note requiring the payment of interest at a statutory rate, and (2) made a gift, distributed a dividend, made a contribution to capital, paid compensation, or made another payment to the borrower which, in turn, is used by the borrower to pay the interest. The difference between the statutory rate of interest and the rate (if any) actually charged by the lender, the “foregone interest,” is thus either a gift to the borrower or income to him, depending on the circumstances. The income tax aspects of below-market loans are discussed in Q 663 and Q 664. The gift tax aspects of such loans are discussed here.

      First, some definitions: The term “gift loan” means any below-market loan where the foregoing of interest is in the nature of a gift as defined under Chapter 12. The term “demand loan” means any loan which is payable in full at any time on the demand of the lender. The term “term loan” means any loan which is not a demand loan. The term “applicable federal rate” means: in the case of a demand loan or a term loan of up to three years, the federal short-term rate; in the case of a term loan over three years but not over nine years, the federal mid-term rate; in the case of a term loan over nine years, the federal long-term rate. In the case of a term loan, the applicable rate is compounded semiannually. These rates are reset monthly.1 The “present value” of any payment is determined as follows: (1) as of the date of the loan; and (2) by using a discount rate equal to the applicable federal rate.2 The term “below-market loan” means any loan if in the case of the following: (1) a demand loan, in which interest is payable on the loan at a rate less than the applicable federal rate; or (2) a term loan, in which the amount loaned exceeds the present value of all payments due under the loan. The term “foregone interest” means, with respect to any period during which the loan is outstanding, the excess of the following: (1) the amount of interest that would have been payable on the loan for the period if the interest accrued on the loan at the applicable federal rate and was payable annually on the last day of the appropriate calendar year; over (2) any interest payable on the loan properly allocable to the period.

      In the case of a demand gift loan, the foregone interest is treated as transferred from the lender to the borrower and retransferred by the borrower to the lender as interest on the last day of each calendar year the loan is outstanding. In the case of a term gift loan, the lender is treated as having transferred on the date the loan was made, and the borrower is treated as having received on such date, cash in an amount equal to the excess of (1) the amount loaned, over (2) the present value of all payments which are required to be made under the terms of the loan. The provisions do not apply in the case of a gift loan between individuals (two spouses are treated as one person) that at no time exceeds $10,000 in the aggregate amount outstanding on all loans, whether below-market or not. The $10,000 de minimis exception does not apply, however, to loans attributable to acquisition of income-producing assets.

      IRC Section 7872 does not apply to life insurance policy loans.3 Neither does IRC Section 7872 apply to loans to a charitable organization if the aggregate outstanding amount of loans by the lender to that organization does not exceed $250,000 at any time during the tax year.4

      The Tax Court has held that IRC Section 483 and safe harbor interest rates contained therein do not apply for gift tax purposes. Consequently, the value of a promissory note given in exchange for real property was discounted to reflect time value of money concepts under IRC Section 7282 (without benefit of IRC Section 483).5

      Prior to the enactment of IRC Section 7872, the Supreme Court held that, in the case of an interest-free demand loan made within a family, a gift subject to federal gift tax is made of the value of the use of the money lent.6 The court did not decide how to value such a gift, but implicit in the decision was the assumption that low-interest or interest-free loans within a family context have, since the first federal gift tax statute was enacted in 1924, resulted in gifts. Revenue Procedure 85-467 provided guidance in valuing and reporting gift demand loans not covered by IRC Section 7872.


      1.      IRC § 1274(d).

      2.      See Prop. Treas. Reg. §1.7872-14.

      3.      Prop. Treas. Reg. §1.7872-5(b)(4).

      4.      Temp. Treas. Reg. §1.7872-5T(b)(9).

      5.      Frazee v. Comm., 98 TC 554 (1992).

      6.     Dickman v. Comm., 465, U.S. 330, 104 S. Ct. 1086 (1984).

      7.      1985-2 CB 507.

  • 897. What are the gift tax implications, if any, when an individual transfers property (or an interest in property) and takes back noninterest-bearing term notes covering the value of the property transferred, and the transferor intends to forgive the notes as they come due?

    • If the transferor’s receipt of the noninterest-bearing notes is characterized as a “term gift loan,” the lender/transferor will be treated as having transferred on the date of the receipt, and the borrower/transferee will be treated as having received on such date, cash in an amount equal to the excess of the following: (1) the amount loaned; over (2) the present value of all payments required to be made under the terms of the loan (see Q 893).1 If the receipt of the notes is not so characterized, then the discussion in the following paragraph, relating to transactions occurring before June 7, 1984, is pertinent.

      The IRS takes the position that such a transfer is a gift of the entire value of the property or interest given at the time of the transfer and is not a sale. If the transfer is of a remainder interest in property, it is a future interest gift that does not qualify for the gift tax annual exclusion (see Q 905). The Service distinguishes between an intent to forgive the notes and donative intent (see Q 893) with respect to transfer of the property: “A finding of an intent to forgive the note relates to whether valuable consideration was received, and thus, to whether the transaction was in reality a bona fide sale or a disguised gift.”2 The Tax Court, however, makes a distinction based on the nature of the notes given, holding that if the notes are secured by valid vendor’s liens, the transaction is to be treated as a sale; a gift occurs on each date a note is due and forgiven, the value of the gift being the amount due on the note.3


      1.      IRC §§ 7872(b)(1), 7872(d)(2).

      2.      Rev. Rul. 77-299, 1977-2 CB 343; Deal, 29 TC 730 (1958).

      3.      Haygood v. Comm., 42 TC 936 (1964), nonacq. 1977-2 CB 2; Est. of Kelley v. Comm., 63 TC 321 (1974), nonacq. 1977-2 CB 2.

  • 898. Are gratuitous transfers by individuals of federal, state, and municipal obligations subject to federal transfer taxes?

    • Yes. Gratuitous transfers of obligations that are exempt from federal income tax are not exempt from federal estate tax, gift tax, or generation-skipping transfer tax, as the case may be – at least as to estates of decedents dying, gifts made, and transfers made on or after June 19, 1984. In the case of any provision of law enacted after July 18, 1984, such provision is not treated as exempting the transfer of property from such transfer taxes unless it refers to the appropriate IRC provisions.1 Also, the removal of transfer tax exemption applies in the case of any transfer of property (or interest in property) if at any time an estate or gift tax return was filed showing such transfer as subject to federal estate or gift tax.2 Congress also added that no inference was to be drawn that transfers of such obligations occurring before such time were exempt from transfer taxation.

      In United States v. Wells Fargo,3 the United States Supreme Court determined that “tax-exempt” bonds have always been subject to transfer taxes unless specifically provided otherwise by statute (even before enactment of TRA ’84, Sec. 641). This determination was based on the longstanding principle that tax exemption cannot be inferred. The differing language concerning project notes issued pursuant to Housing Acts, providing at one time for exemption from all taxation and at another for exemption from all taxation except surtax, estate, inheritance, and gift taxes, could be explained by the need to address a surtax in 1937, and not by a Congressional intent to exempt the project notes from estate taxation, the court concluded. The project notes were not exempt from transfer taxes, the court ruled, and included the notes in the decedent’s estate.


      1.      TRA ’84, § 641.

      2.      TRA ’84, § 641(b)(2).

      3.      485 U.S. 351, 708 S. Ct. 1179, 88-1 USTC ¶ 13,759 (U.S. 1988).

  • 899. What are the federal gift tax implications of taking title to investment property in joint names?

    • There may be a gift for federal gift tax purposes either at the time title is taken in joint names or at a later time when one of the joint owners reduces some or all of the property to his own possession. Consider the following examples:

      “If A creates a joint bank account for himself and B (or a similar type of ownership by which A can regain the entire fund without B’s consent), there is a gift to B when B draws upon the account for his own benefit, to the extent of the amount drawn without any obligation to account for a part of the proceeds to A. Similarly, if A purchases a United States savings bond, registered as payable to ‘A or B,’ there is a gift to B when B surrenders the bond for cash without any obligation to account for a part of the proceeds to A.”1 Likewise, “where A, with his separate funds, creates a joint brokerage account for himself and B, and the securities purchased on behalf of the account are registered in the name of a nominee of the firm, A has not made a gift to B, for federal gift tax purposes, unless and until B draws upon the account for his own benefit without any obligation to account to A. If B makes a withdrawal under such circumstances, the value of the gift by A would be the sum of money or the value of the property actually withdrawn from the account by B.”2 Thus, the creation of a joint account or similar type of ownership by itself, does not constitute a completed transfer from the creator and sole contributor if the creator and sole contributor can regain the existing account without the joint owner’s consent.

      “If A with his own funds purchases property and has the title conveyed to himself and B as joint owners, with rights of survivorship (other than a joint ownership described in [the foregoing paragraph]) but which rights may be defeated by either party severing his interest, there is a gift to B in the amount of half the value of the property.”3

      Where A purchases and registers U.S. Treasury notes in the names of “A or B or survivor” in a jurisdiction in which this registration creates a joint tenancy, there is a completed gift of the survivorship rights in the notes and an undivided one-half interest in the interest payments and redemption rights pertaining to the notes. In a jurisdiction in which a joint tenancy is not created by such registration, there is a gift of the survivorship rights in the interest payments and in the notes at maturity.4 Computation of the value of the gifts in both situations is set forth in Revenue Ruling 78-215.

      In the above examples, if A and B are spouses, any gift will be offset by the marital deduction to the extent available (see Q 912).5


      1.      Treas. Reg. § 25.2511-1(h)(4).

      2.      Rev. Rul. 69-148, 1969-1 CB 226.

      3.      Treas. Reg. § 25.2511-1(h)(5).

      4.      Rev. Rul. 78-215, 1978-1 CB 298.

      5.      Treas. Reg. § 25.2523(d)-1.

  • 900. What are the federal gift tax results if the donee agrees to pay the gift tax?

    • If a gift is made subject to the express or implied condition that the donee pay the gift tax, the donor may deduct the amount of tax from the gift in determining the value of the gift. In such a transaction, the donor receives consideration for the transfer in the amount of the gift tax paid by the donee. Thus, to the extent of the tax paid, the donee does not receive a gift.1 Similarly, if the donor makes a gift in trust subject to an agreement that the trustee pay the gift tax, the value of the property transferred is reduced for gift tax purposes by the amount of the tax.2

      The computation of the tax requires the use of an algebraic formula, since the amount of the tax is dependent on the value of the gift which in turn is dependent on the amount of the tax. The formula is as follows:

      Tentative Tax = True Tax
      1 plus Rate of Tax

       

      Examples illustrating the use of this formula, with the algebraic method, to determine the tax in a net gift situation are contained in IRS Publication 904 (Rev. May 1985). Three of the examples show the effect of a state gift tax upon the computation.

      Although the donee pays the tax, it is the donor’s unified credit that is used in computing the gift tax, not the donee’s.3


      1.      Rev. Rul. 75-72, 1975-1 CB 310; Diedrich v. Comm., 102 S. Ct. 2414 (1982).

      2.      Lingo, 13 TCM 436 (1959); Harrison, 17 TC 1350 (1952), acq. 1952-2 CB 2.

      3.      Let. Rul. 7842068.

  • 901. How is a gift of property under either the Uniform Gifts to Minors Act or under the Uniform Transfers to Minors Act treated for federal gift tax purposes?

    • Any transfer of property to a minor under either of the Uniform Acts constitutes a complete gift for federal gift tax purposes to the extent of the full fair market value of the property transferred. Generally, such a gift qualifies for the gift tax annual exclusion (see Q 905).1 The allowance of the exclusion is not affected by the amendment of a state’s Uniform Act lowering the age of majority and thus requiring that property be distributed to the donee at age 18.2 These rulings base the allowance of the exclusion on the assumption that gifts under the Uniform Acts come within the purview of IRC Section 2503(c). Gifts to minors under IRC Section 2503(c) must pass to the donee on his attaining age 21. If a state statute varies from the Uniform Act by providing that under certain conditions custodianship may be extended past the donee’s age 21, gifts made under those conditions would not qualify for the exclusion. For tables of state laws concerning the Uniform Acts, see Appendix D of Tax Facts on Investments.


      1.      Rev. Rul. 56-86, 1956-1 CB 449; Rev. Rul. 59-357, 1959-2 CB 212.

      2.      Rev. Rul. 73-287, 1973-2 CB 321.

  • 902. When is a gift made with respect to an education savings account?

    • Contributions to an education savings account are treated as completed gifts to the beneficiary of a present interest in property which can qualify for the gift tax and generation-skipping transfer (GST) tax annual exclusion. The contributions must be in cash and prior to the beneficiary’s 18th birthday. If the contribution is made for a beneficiary designated with special needs, the age limit does not apply.1 If contributions for a year exceed the gift tax annual exclusion, the donor can elect to prorate the gifts over a five-year period beginning with such year. A contribution to an education savings account does not qualify for the gift tax or GST tax exclusion for qualified transfers for educational purposes.2 Distributions from an education savings account are not treated as taxable gifts. Also, if the designated beneficiary of the education savings account is changed, or if funds in the education savings account are rolled over to a new beneficiary, such a transfer is subject to the gift tax or GST tax only if the new beneficiary is a generation below the old beneficiary. Transfers within the same generation do not trigger a gift tax liability.3

      See Q 843 for the estate tax treatment and Q 681 for the income tax treatment of education savings accounts.


      1.      IRC § 530(b)(1).

      2.      IRC §§ 530(d)(3), 529(c)(2).

      3.      IRC §§ 530(d)(3), 529(c)(5).

  • 903. When is a gift made with respect to a qualified tuition program?

    • For gift tax and generation-skipping transfer (GST) tax purposes, a contribution to a qualified tuition program on behalf of a designated beneficiary is not treated as a qualified transfer for purposes of the gift tax and GST tax exclusion for educational expenses, but is treated as a completed gift of a present interest to the beneficiary which qualifies for the annual exclusion (see Q 905). If a donor makes contributions to a qualified tuition program in excess of the gift tax annual exclusion, the donor may elect to take the donation into account ratably over a five-year period.1 Distributions from a qualified tuition program are not treated as taxable gifts. Also, if the designated beneficiary of a qualified tuition program is changed, or if funds in a qualified tuition program are rolled over to the account of a new beneficiary, such a transfer is subject to the gift tax or generation-skipping transfer tax only if the new beneficiary is a generation below the old beneficiary.2

      See Q 844 for the estate tax treatment and Q 687 for the income tax treatment of qualified tuition programs.


      1.      IRC § 529(c)(2).

      2.      IRC § 529(d)(5)(B).

  • 904. When is the “split-gift” provision available?

    • When one of two spouses makes a gift to a third person, it may be treated as having been made one-half by each if the other spouse consents to the gift.1


      Planning Point: The split-gift provision enables a spouse who owns most of the property to take advantage of the other spouse’s annual exclusions (see Q 905) and unified credit (see Q 914). Thus, a spouse, with the other spouse’s consent, can give up to $34,000 (2 × $17,000 annual exclusion in 2023) a year to each donee free of gift tax, and, in addition, will have both their unified credits to apply against gift tax imposed on gifts in excess of the annual exclusion. Moreover, by splitting the gifts between spouses, they will fall in lower gift tax brackets.


      Where spouses elect to use the “split-gift” provision, the consent applies to all gifts made by either spouse to third persons during the calendar year.2 The consent must be made on the Form 709. By consenting to gift splitting, a spouse may assume joint and several liability for any gift tax assessed on the gift.3 A technical advice memorandum permitted a taxpayer to elect after the spouse’s death to split gifts with his spouse where the gifts were made by the taxpayer shortly before the spouse’s death.4


      1.      IRC § 2513; Treas. Reg. § 25.2513-1.

      2.      IRC § 2513(a)(2).

      3.      Williams v. U.S., 378 F.2d 693 (Ct. Cl. 1967).

      4.      TAM 9404023.

  • 905. What is the gift tax annual exclusion and when is it available to a donor?

    • The gift tax annual exclusion is an exclusion of $10,000 as indexed ($18,000 in 2024, $17,000 in 2023, $16,000 in 2022, $15,000 in 2018-2021)1  per calendar year per donee applied to gifts of a present interest in property. The $10,000 amount is adjusted for inflation, rounded down to the next lowest multiple of $1,000, after 1998. The exclusion is not cumulative; that is, an exclusion unused in one year cannot be carried over and used in a future year. A gift of a present interest is one in which the donee has the right to immediate possession, use, and enjoyment of the property.

      The exclusion does not apply to gifts of a future interest in property, i.e., the right to use and enjoy the property only in the future. For example, if G transfers income producing property in trust, the terms of which provide that the income from the trust property will be paid to A for lifetime and upon A’s death the trust property will be paid to B free of trust, A’s life income interest would be a present interest gift and B’s remainder interest would be a future interest gift. G would be allowed to exclude from the value of gifts reported on the gift tax return the value of A’s life income interest up to $18,000 (in 2024, assuming G made no other present interest gifts to A during the calendar year), but he would not be able to exclude any of the value of B’s remainder interest. If the trustee were given discretion to withhold payments of income to A and add such amounts to the trust corpus, A’s income interest would not be a present interest, and G would not be allowed to claim any exclusion.

      Substance over form analysis may be applied to deny annual exclusions where indirect transfers are used in an attempt to obtain inappropriate annual exclusions for gifts to intermediate recipients.2 For example, suppose A transfers $17,000 to each of B, C, and D in 2022. By arrangement, B, C, and D each immediately transfer $17,000 to E. The annual exclusion for A’s indirect transfers to E is limited to $17,000 and A has made taxable gifts of $34,000 to E.

      An outright gift of a bond, note (though bearing no interest until maturity), or other obligation which is to be discharged by payments in the future is a gift of a present interest. Normally, a direct gift of shares of corporate stock is a present interest gift. However, if the gift is made subject to a stock transfer restriction agreement under which the donee is prohibited for a period of time from selling or pledging the stock, it has been held that the gift is one of a future interest which does not qualify for the gift tax annual exclusion.


      1.      Rev. Proc. 2017-58, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34.

      2.      Heyen v. U.S., 945 F.2d 359, 91-2 USTC ¶ 60,085 (10th Cir. 1991).

  • 906. When will the gift tax annual exclusion be available with respect to gifts of property in trust?

    • A gift of property to a trust which directs the trustee to distribute the trust income annually to the beneficiary is a present interest gift of an income interest qualifying for the annual exclusion. However, a gift of property to a trust which directs the trustee to distribute from the trust annually a certain dollar amount to the beneficiary is a gift of a future interest not qualifying for the exclusion.

      A gift of property in trust will qualify for the gift tax annual exclusion if the trust terms (1) provide that the trust beneficiary (or beneficiaries) be given timely written notice (notice given within 10 days after the transfer has been held timely) that the beneficiary has a reasonable period (45 days has been held reasonable) within which to demand immediate withdrawal (usually the trust specifies that the withdrawal right is limited to the amount of the exclusion), and (2) give the trustee the power to convert property in the trust to cash to the extent necessary to meet withdrawal demands. Such trusts are popularly known as Crummey trusts, after the name of a leading case that upheld them.1

      The IRS has ruled with respect to Crummey trusts that the annual exclusion could not be applied to trust contributions on behalf of trust beneficiaries who had withdrawal rights as to the contributions (except to the extent they exercised their withdrawal rights) but who had either no other interest in the trust (a naked power) or only remote contingent interests in the remainder.2 However, the Tax Court has rejected the IRS’ argument that a power holder must hold rights other than the withdrawal right to obtain the annual exclusion. The withdrawal right (assuming there is no agreement to not exercise the right) is sufficient to obtain the annual exclusion.3 (Language in Cristofani appears to support use of naked powers, although the case did not involve naked powers.) The Tax Court recently held the donor does not have to give the beneficiaries of a trust notice of the gift in certain circumstances.4

      In an Action on Decision, the Service stated that, applying the substance over form doctrine, the annual exclusions should not be allowed where the withdrawal rights are not in substance what they purport to be in form. If the facts and circumstances show an understanding that the power is not meant to be exercised or that exercise would result in undesirable consequences, then creation of the withdrawal right is not a bona fide gift of a present interest and an annual exclusion should not be allowed.5 In TAM 9628004, annual exclusions were not allowed where transfers to trust were made so late in the first year that Crummey withdrawal powerholders had no opportunity to exercise their rights, most powerholders had either no other interest in the trust or discretionary income or remote contingent remainder interests, and withdrawal powers were never exercised in any year. However, annual exclusions were allowed where the IRS was unable to prove that there was an understanding between the donor and the beneficiaries that the withdrawal rights should not be exercised.6 In TAM 9731004, annual exclusions were denied where eight trusts were created for eight primary beneficiaries, but Crummey withdrawal powers were given to 16 or 17 persons who never exercised their powers and most powerholders held either a remote contingent interest or no interest other than the withdrawal power in the trusts in which the powerholder was not the primary beneficiary.

      The annual exclusion was not allowed where the beneficiaries waived their right to receive notice of contributions to a trust with respect to which their withdrawal rights could be exercised. Furthermore, the annual exclusion was not allowed because the grantor set up a trust which provided that notice was to be given to the trustee as to whether a beneficiary could exercise a withdrawal power with respect to a transfer to a trust and the grantor never notified the trustee that the withdrawal powers could be exercised with respect to any of the transfers to trust.7


      1.      Crummey v. Comm., 397 F.2d 82 (9th Cir. 1968); Rev. Rul. 73-405, 1973-2 CB 321; Rev. Rul. 81-7, 1981-1 CB 474; Rev. Rul. 83-108, 1983-2 CB 167; Let. Ruls. 8022048, 8134135, 8118051, 8134135, 8445004, 9625031.

      2.      TAMs 9141008, 9045002, 8727003.

      3.      Est. of Cristofani v. Comm., 97 TC 74 (1991), acq. in result, 1996-2 CB 1.

      4.      Estate of Clyde W. Turner v. Comm., TC Memo 2011-209.

      5.      AOD 1996-010.

      6.      Est. of Kohlsaat v. Comm., TC Memo 1997-212; Est. of Holland v. Comm., TC Memo 1997-302.

      7.      TAM 9532001.

  • 907. When will a gift of a donor’s interest in real estate qualify for the gift tax annual exclusion?

    • It has been held that the gift of a portion of the donor’s interest in real property, if under the terms of the transfer the donee receives the present unrestricted right to the immediate use, possession, and enjoyment of an ascertainable interest in the property, qualifies for the gift tax annual exclusion.

      If a donor transfers a specified portion of real property subject to an “adjustment clause” (i.e., under terms that provide that if the IRS subsequently determines that the value of the specified portion exceeds the amount of the annual exclusion, the portion of property given will be reduced accordingly, or the donee will compensate the donor for the excess), the IRS has ruled the adjustment clause will be disregarded for federal tax purposes.1

      A donor’s gratuitous payment of the monthly amount due on the mortgage on a house owned in joint tenancy by others has been held a present interest gift to the joint tenants in proportion to their ownership interests.2


      1.      Rev. Rul. 86-41, 1986-1 CB 300.

      2.      Rev. Rul. 82-98, 1982-1 CB 141.

  • 908. When will a gift of property to a minor qualify for the gift tax annual exclusion?

    • A gift of property to a minor, whether in trust or otherwise, is not considered a gift of a future interest in property, so that it will qualify for the gift tax annual exclusion, if the terms of the transfer satisfy all the following conditions:

      (1)    Both the property itself and its income may be expended by or for the benefit of the donee before he attains the age of 21 years;

      (2)    Any portion of the property and its income not disposed of under (1) will pass to the donee when he attains the age of 21 years; and

      (3)    Any portion of the property and its income not disposed of under (1) will be payable either to the estate of the donee or as he may appoint under a general power of appointment if he dies before attaining the age of 21 years.1

      A gift to a minor under the Uniform Gifts to Minors Act or under the Uniform Transfers to Minors Act generally is a gift of a present interest and qualifies for the annual exclusion.2 Most states in recent years have adopted the later Uniform Transfers to Minors Act, which allows for any kind of property, real or personal, tangible or intangible, to be transferred under the Act. Other states have amended their Uniform Gifts to Minors Act to provide for gifts of various kinds of property ranging from real estate to partnership interests and other tangible and intangible interests in property. Originally, the Uniform Act provided for gifts of only money or securities. The allowance of the exclusion is not affected by the amendment of a state’s Uniform Act lowering the age of majority and thus requiring that property be distributed to the donee at age 18.3 The revenue rulings cited in this paragraph base the allowance of the exclusion on the assumption that gifts under the Uniform Act come within the purview of IRC Section 2503(c). Gifts to minors under IRC Section 2503(c) must pass to the donee on his attaining age 21. If a state statute varies from the Uniform Act by providing that under certain conditions custodianship may be extended past the donee’s age 21, gifts made under those conditions would not qualify for the exclusion. For a state-by-state summary of the types of property which can be given under, and the adult age for purposes of, the Uniform Act, see www.TaxFactsUpdates.com.


      1.      IRC § 2503(c); Treas. Reg. § 25.2503-4(a).

      2.      Rev. Rul. 59-357, 1959-2 CB 212; Rev. Rul. 73-287, 1973-2 CB 321.

      3.      Rev. Rul. 73-287, 1973-2 CB 321.

  • 909. When will a gift of property to a corporation qualify for the gift tax annual exclusion?

    • A gift of property to a corporation generally represents a gift of a future interest in the property (so that it will not qualify for the gift tax annual exclusion, see Q 906) to the individual shareholders to the extent of their proportionate interests in the corporation.1 Also a gift for the benefit of a corporation is a gift of a future interest in the property to its shareholders and does not qualify for the annual exclusion.2 In contrast, gifts made to individual partnership capital accounts have been treated as gifts of a present interest which qualify for the annual exclusion where the partners were free to make immediate withdrawals of the gifts from their capital accounts.3 However, annual exclusions were denied for gifts of limited partnership interests where (1) the general partner could retain income for any reason whatsoever, (2) limited partnership interests could not be transferred or assigned without the permission of a supermajority of other partners, and (3) limited partnership interests generally could not withdraw from the partnership or receive a return of capital contributions for many years into the future.4 Similarly, annual exclusions were denied for gifts of business interests where the beneficiaries were not free to withdraw from the business entity, could not sell their interests, and could not control whether any income would be distributed (and no immediate income was expected).5


      1.      Treas. Reg. § 25.2511-1(h)(1); Rev. Rul. 71-443, 1971-2 CB 337; Stinson v. U.S., 2000-1 USTC ¶ 60,377 (7th Cir. 2000); Hollingsworth v. Comm., 86 TC 91 (1986).

      2.      Let. Rul. 9114023.

      3.      Wooley v. U.S., 736 F. Supp. 1506, 90-1 USTC ¶ 60,013 (S.D. Ind. 1990).

      4.      TAM 9751003.

      5.      Hackl v. Comm., 335 F.3d 664, 2003-2 USTC ¶ 60,465 (7th Cir. 2003), aff’g 118 TC 279 (2002).

  • 910. How does the splitting of gifts between spouses affect the gift tax annual exclusion?

    • By means of the “split gift” provision (see Q 904), a married couple can effectively use each other’s annual exclusions. Thus, if, in 2023, A makes a $34,000 gift of securities to his child, C, and A’s spouse, B, joins in making the gift (by signifying her consent on the gift tax return), the gift would be considered as having been made one-half by each, the exclusion is effectively doubled, and no gift tax would have to be paid (assuming neither A nor B made any other gifts to C during the calendar year).1 However, if A and B join in making the same gift to F, child of A’s brother D and spouse E, while at the same time D and E make similar gifts to C and F, the scheme does not effectively again double the exclusion.2

      If the spouse of the donor is not a United States citizen, the annual exclusion for a transfer from the donor spouse to the non-citizen spouse is increased from $10,000 (as indexed) to $100,000 as indexed ($152,000 for 2018, $155,000 for 2019, $157,000 in 2020, $159,000 in 2021, $164,000 in 2022, $175,000 in 2023, $185,000 in 2024)3 (provided the transfer would otherwise qualify for the marital deduction if the donee spouse were a United States citizen). The $100,000 amount is adjusted for inflation, as is the $10,000 amount.4 However, the marital deduction is not available for a transfer to a spouse who is not a United States citizen (see Q 912).


      1.      IRC § 2513; Treas. Reg. § 25.2513-1.

      2.    TAM 8717003; Schuler v. Comm., 282 F.3d 575, 2002-1 USTC ¶ 60,432 (8th Cir. 2002); Sather v. Comm., 251 F.3d 1168 (8th Cir. 2001).

      3.    Rev. Proc. 2017-58, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34. See Appendix D for earlier years.

      4.      IRC § 2523(i).

  • 911. What gift tax exclusion applies, if any, for gifts made for education or medical expenses?

    • A “qualified transfer” is not considered a gift for gift tax purposes. A “qualified transfer” means any amount paid on behalf of an individual–

      (A)    as tuition to an educational organization1 for the education or training of such individual, or

      (B)    to any person who provides medical care2 with respect to such individual as payment for such medical care.3 A technical advice memorandum treated tuition payments for future years as qualified transfers where the payments were nonrefundable.4


      1.      IRC § 170(b)(1)(A)(ii).

      2.      As defined in IRC § 213(d).

      3.      IRC § 2503(e); Rev. Rul. 82-98, 1982-1 CB 141.

      4.      Let. Rul. 200602002; TAM 199941013.

  • 912. What is the gift tax marital deduction?

    • The gift tax marital deduction is a deduction for the entire value of gifts made between spouses.1 The deduction does not apply, however, to a gift of a “nondeductible terminable interest” in property.2 A “terminable interest” in property is an interest which will terminate or fail on the lapse of time or on the occurrence or failure to occur of some contingency. Life estates, terms for years, annuities, patents, and copyrights are therefore terminable interests. However, a bond, note, or similar contractual obligation, the discharge of which would not have the effect of an annuity or term for years, is not a terminable interest.3

      In general, if a donor transfers a terminable interest in property to the donee spouse, the marital deduction is disallowed with respect to the transfer if the donor spouse also (1) transferred an interest in the same property to another donee, or (2) retained an interest in the same property in himself, or (3) retained a power to appoint an interest in the same property, and (4) gave the other donee, himself, or the possible appointee the right to possess or enjoy any part of the property after the termination or failure of the interest transferred to the donee spouse.4 However, a terminable interest in property qualifies for the marital deduction (referred to as “QTIP”) if the donee spouse is given (1) a right to the income from the property for life and a general power of appointment over the principal; or (2) a “qualifying income interest for life” in property transferred by the donor spouse as to which the donor must make an election (on or before the date, including extensions, for filing a gift tax return with respect to the year in which the transfer was made–see Q 915) to have the marital deduction apply. The QTIP regulations provide an exception to the estate tax inclusion issues that arise under Sections 2036 and 2038.5

      The donee spouse has a “qualifying income interest for life” if (1) the donee spouse is entitled to all the income from the property, payable annually or at more frequent intervals, and (2) no person has a power to appoint any part of the property to any person other than the donee spouse during the donee spouse’s lifetime.6 Also, the interest of a donee spouse in a joint and survivor annuity in which only the donor and donee spouses have a right to receive payments during such spouses’ joint lifetimes is treated as a “qualifying income interest for life” unless the donor spouse irrevocably elects otherwise within the time allowed for filing a gift tax return.7

      In the two exceptions to the nondeductible terminable interest rule explained above, income producing property is contemplated. If a gift of non-income producing property in a form to comply with either of the two exceptions is proposed, Treasury Regulation Section 25.2523(e)-1(f) should be read carefully. A marital deduction has been disallowed for a transfer to an irrevocable trust where state law provided that the interest given the spouse would be revoked upon divorce and the grantor had not provided in the trust instrument that the trust would not be revoked upon divorce.8

      If the spouse of the donor is not a United States citizen, the marital deduction is not available for a transfer to such a spouse. However, in such a case, the annual exclusion (see Q 905) for the transfer from the donor spouse to the non-citizen spouse is increased from $10,000 as indexed ($18,000 in 2024, $17,000 in 2023, $16,000 in 2022, $15,000 in 2018-2021) to $100,000 as indexed ($185,000 in 2024, $175,000 in 2023, $164,000 in 2022, $159,000 in 2021, $157,000 in 2020, $155,000 in 2019, and $152,000 in 20189 (provided the transfer would otherwise qualify for the marital deduction if the donee spouse were a United States citizen). The $100,000 amount is adjusted for inflation, as is the $10,000 amount (see Q 905).10


      1.      IRC § 2523(a).

      2.      IRC § 2523(b); Treas. Reg. §§ 25.2523(a)-1(b)(2), 25.2523(b)-1.

      3.      Treas. Reg. § 25.2523(b)-1(a)(3).

      4.      Treas. Reg. § 25.2523(b)-1(a)(2).

      5.      Treas. Reg. § 25.2523(f)-1(d)(1).

      6.      IRC §§ 2523(e), 2523(f).

      7.      IRC § 2523(f)(6).

      8.      TAM 9127005.

      9.    Rev. Proc. 2017-58, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34. See Appendix D for earlier years.

      10.     IRC § 2523(i).

  • 913. Is a gift tax deduction allowed for gifts to charity?

    • Yes. In general, a deduction is allowed for the entire value of gifts to qualified charitable organizations.1

      Where a donor makes a gift of an interest in property (other than a remainder interest in a personal residence or farm or an undivided portion of the donor’s entire interest in property or certain gifts of property interests exclusively for conservation purposes) to a qualified charity, and an interest in the same property is retained by the donor or is given to a donee that is not a charity, no charitable deduction is allowed for the interest given the charity unless:

      (1)    in the case of a remainder interest, such interest is in a trust which is a charitable remainder annuity trust (see Q 8087) or a charitable remainder unitrust (see Q 8088) or a pooled income fund (see Q 8096); or

      (2)    in the case of any other interest (such as an interest in the income from a short term trust), such interest is in the form of a guaranteed annuity or is a fixed percentage of the fair market value of the property distributed yearly (to be determined yearly).2

      A charitable contribution deduction is allowable for a gift to charity of a legal remainder interest in the donor’s personal residence even though the interest conveyed to charity is in the form of a tenancy in common with an individual.3

      If an individual creates a qualified charitable remainder trust in which his spouse is the only non-charitable beneficiary other than certain ESOP remainder beneficiaries, the grantor will receive a charitable contributions deduction for the value of the remainder interest.4


      1.      IRC §§ 2522(a), 2522(b).

      2.      IRC § 2522(c); Rev. Rul. 77-275, 1977-2 CB 346.

      3.      Rev. Rul. 87-37, 1987-1 CB 295, revoking Rev. Rul. 76-544, 1976-2 CB 288.

      4.      IRC § 2522(c)(2).

  • 914. What is the gift tax unified credit?

    • It is a dollar amount ($5,389,800 in 2024, $5,113,800 in 2023, $4,769,800 in 2022, $4,625,800 in 2021, $4,577,800 in 2020, $4,505,800 in 2019, and $4,419,800 in 2018)1 that is credited against the gift tax computed as shown in Q 892.2 In 2010, the credit exempted $1,000,000 of taxable gifts from the gift tax (the dollar amount exempted is referred to as the “gift tax applicable exclusion amount”). For 2011, the amount increased to $5,000,000, and was adjusted for inflation to $5,490,000 in 2017, and the 2017 Tax Act doubled the amount to $11,800,000 in 2018, $11,400,000 in 2019, $11,580,000 in 2020, $11,700,000 in 2021, $12,060,000 in 2022, $12,920,000 in 2023 and $13,610,000 in 2024.3 Any gifts made over the gift tax applicable exclusion amount are taxed at a 40 percent rate (in 2013 and thereafter). (For application of the unified credit to the federal estate tax, see Q 861.) The credit is referred to as “unified” because the current credit applies to the gift tax (section 2505), the GST tax (section 2641) or the estate tax (section 2010).

      The amount of unified credit allowed against the tax on gifts made in any calendar year cannot exceed the dollar amount of credit applicable to the period in which the gifts were made, reduced by the sum of the amounts of unified credit allowed the donor against gifts made in all prior calendar periods, and reduced further by the rule explained in the next paragraph (but in no event can the allowable credit exceed the amount of the tax). The unused exemption of a deceased spouse may be transferred to the surviving spouse to increase the gift or estate applicable exclusion amount for the surviving spouse.4

      The unified credit was enacted by the Tax Reform Act of 1976. Under prior law, separate exemptions were provided for estate and gift taxes. The gift tax specific exemption was $30,000 for each donor (or $60,000 if the donor’s spouse joined in making the gift). The exemption was not applied automatically, as in the case of the unified credit, but had to be elected by the donor, and once used was gone. The law provides that as to gifts made after September 8, 1976, and before January 1, 1977, if the donor elected to apply any of his lifetime exemption to such gifts, his unified credit is reduced by an amount equal to 20 percent of the amount allowed as a specific exemption.5 (The unified credit is not reduced by any amount allowed as a specific exemption for gifts made prior to September 9, 1976.)

      Under 2010 TRA, a donor can make gifts, without incurring a gift tax liability, up to the difference between the current year’s applicable exclusion amount and the prior taxable gifts.

      By means of the “split gift” provision (see Q 904), a married couple can effectively use each other’s unified credit.


      1.      Rev. Proc. 2017-58, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34.

      2.      IRC § 2505, as amended by EGTRRA 2001.

      3.      Pub. Law. No. 115-97 (the 2017 Tax Act), Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34.

      4.      IRC §§ 2505(a)(i); 2010.

      5.      IRC § 2505(c).

  • 915. What are the requirements for filing the gift tax return and paying the tax?

    • A donor need not file a gift tax return if the only gifts made during the calendar year are covered by the annual exclusion (Q 905) or the marital deduction (Q 912), or are gifts to charity of the donor’s entire interest in the property transferred where the donor does not (and has not) transferred any interest in the property to a noncharitable beneficiary. (Amounts paid on behalf of an individual as tuition to an educational organization or to a person providing medical care are not considered gifts for gift tax purposes.)1 However, in the case of a split gift (where the donor’s spouse joins in making a gift to a third party), a gift tax return must be filed even though the amount of the gift comes within the spouses’ annual exclusions.

      The return (Form 709) is due on or before April 15 following the close of the calendar year for which the return is made; however, if the donor is given an extension of time for filing the income tax return, the same extension applies to filing the gift tax return. Where a gift is made during the calendar year in which the donor dies, the time for filing the gift tax return is not later than the time (including extensions) for filing the estate tax return.2 However, should the time for filing the estate tax return fall later than the 15th day of April following the close of the calendar year, the time for filing the gift tax return is on or before the 15th day of April following the close of the calendar year, unless an extension (not extending beyond the time for filing the estate tax return) was granted for filing the gift tax return. If no estate tax return is required to be filed, the time for filing the gift tax return is on or before the 15th day of April following the close of the calendar year, unless an extension was given for filing the gift tax return.3

      The penalty for failure to timely file a federal tax return is 5 percent of the tax for each month the return is past due, up to a maximum of 25 percent. The penalty can be avoided only if “it is shown that such failure is due to reasonable cause and not due to willful neglect.”4 The regulations say that “reasonable cause” means that the taxpayer filing a late return must show that he “exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.”5 In United States v. Boyle,6 the Supreme Court held that a taxpayer’s reliance on an agent who says he will file the appropriate tax return does not avoid the penalty tax for failure to make a timely filing. However, the Court was careful to distinguish the case where the taxpayer relies on his tax advisor to determine whether a return should be filed at all. In Estate of Buring v. Commissioner,7 the estate avoided the penalty tax because the Court found that the decedent had relied upon her accountant’s advice in failing to file gift tax returns for substantial advances of cash the decedent made to her son, even though the accountant apparently had not actually advised her that it was not necessary to file gift tax returns.

      The gift tax is payable by the donor on the date the gift tax return is due to be filed (April 15). An extension of time given to file the return does not act as an extension of time to pay the tax.8 If the donor does not pay the tax when it is due, the donee is liable for the tax to the extent of the value of the gift.9 If an extension of time for payment of the tax is granted, interest compounded daily is charged at an annual rate adjusted quarterly so as to be three percentage points over the short term federal rate.10 The underpayment rate for the second quarter of 2023 is 7 percent.11


      1.      IRC § 2503(e); IRC § 6019.

      2.      IRC § 6075.

      3.      IRC § 6075; Treas. Reg. § 25.6075-1(b)(2).

      4.      IRC § 6651(a)(1).

      5.      Treas. Reg. §301.6651-1(c)(1).

      6.      105 S. Ct. 687 (1985).

      7.      TC Memo 1985-610.

      8.      IRC §§ 2502(c), 6151(a).

      9.      IRC § 6324(b); Comm. v. Chase Manhattan Bank, 259 F.2d 231 (5th Cir. 1958).

      10.     IRC §§ 6601(a), 6621(a)(2).

      11.     Rev. Rul. 2023-04.