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 $18,000 to each of B, C, and D in 2024. By arrangement, B, C, and D each immediately transfer $18,000 to E. The annual exclusion for A’s indirect transfers to E is limited to $18,000 and A has made taxable gifts of $36,000 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.

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1. Rev. Proc. 2016-55, 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.