Now, to put a finer point on the discussion, we need to recognize that there are some limits on allowance of the annual exclusion. The chief one is that the exclusion is allowed only with respect to what are called “present interests.” What is a present interest? It’s a benefit that commences in enjoyment immediately upon the making of the gift.
Example: Tillie sets up a trust (a charitable lead trust) that is to make payments to Charity for 15 years. At the end of the 15-year term, all trust assets are to be distributed equally to Tillie’s six grandchildren (or their survivors). Tillie is deemed, on creation of the trust, to make a gift to each of her grandchildren. Because each gift is of a future interest, not a present interest, no annual exclusion is allowed with respect to the six gifts.
So, what happens? Does Tillie wind up having to pay gift tax? Maybe, maybe not. It all depends on how much of her exemption against gift and estate taxes she has left … and also on how large the gifts are to the grandchildren. The exemption, which is inflation-adjusted each year, is $5.49 million for 2017, or less if Tillie has used part of the exemption in prior years to shield gifts from gift tax. If, for example, the total of gifts to the grandchildren is $1 million, and Tillie has $4.9 million of exemption remaining, Tillie will use up $1 million of her remaining exemption and pay no gift tax.
Please note that to the extent the annual exclusion is allowed, the gift and estate tax exemption is not “consumed” (reduced). So, for example, if Tillie gives $15,000 in checks to each of her six grandchildren in 2017, her exemption is reduced by $6,000 (6 x $1,000), not by $90,000 (6 x $15,000).
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by: Jon Tidd