When a Gift Isn't Really a Gift

Article excerpt

The Internal Revenue Service has issued two technical advice memos that illustrate how closely the agency scrutinizes irrevocable trusts, and contributions that supposedly aren't subject to federal gift tax.

The law works this way: A donor can give $10,000 annually to each beneficiary of a trust without paying the gift tax, provided the contribution can be used when it is made. In the parlance of the IRS, it must be a gift of "present interest." A contribution for future use does not qualify for this tax exclusion. In order to claim the exclusion, a donor must notify the beneficiaries of their right to withdraw funds (known as the Crummey power).

In one ruling, the IRS said the contributions to the trust were taxable because the donors a set of grandparents-failed to notify their nine grandchildren (the beneficiaries) every time money was added to the trust, with the exception of the first deposit. After that first donation, the children signed a waiver of their right to receive notices about withdrawing funds. …