Taxation of Estates and Gifts

Annual Exclusion

The first $10,000 (adjusted for inflation, so $15,000 in 2019) of gifts can be excluded per donee per year. 26 U.S.C. § 2503(b)(1).

Gifts of future interests are denied the annual exclusion. Only present interests qualify. 26 U.S.C. § 2503(b)(1).

Income from a discretionary trust does not qualify for the annual exclusion because the beneficiaries thereof do not have a present interest then. 26 CFR § 25.2503-3(c)

  • If the settlor retains the right to withhold the money, each individual distribution uses the annual exclusion for that year. 26 CFR § 25.2511-2(b)–(c).
  • If the trustee has the discretion to decide the portions among the beneficiaries, they still have no present interest. The entire amount will be included in that year's taxable gifts, and there're no annual exclusions in the distribution years.
    • It's still irrevocable, so you still have to pay the taxes. It's just discretionary so you don't get the deductions.