Gift Taxes: Present vs. Future Interest | Complete vs. Incomplete | Tax Compliance and Planning

In this video, I discuss gift tax issues such as future interest, present interest, complete and incomplete gift as covered on the CPA exam TCP section.
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In the realm of estate planning and taxation, gifts can be categorized into two types: present interests and future interests. A present interest in property means that the recipient (donee) has an immediate right to use, possess, or enjoy the property. This type of interest typically qualifies for an annual exclusion from the donor's estate for tax purposes, meaning it can be given without incurring gift tax up to a certain amount.
On the other hand, a future interest is a gift that the donee will only have the right to use, possess, or enjoy at some future date or upon a certain condition being met. Examples include trusts where the beneficiary can only access the assets upon reaching a certain age. Future interests do not qualify for the annual exclusion, meaning they are subject to gift tax regardless of their amount. Therefore, the donor often needs to file a gift tax return for these types of gifts.
Future interest gifts are a category in estate and gift planning where the recipient's enjoyment or control over the gifted asset is postponed to a future date or contingent upon a future event. These include:
Reversions: This occurs when someone gifts an asset but retains the right to reclaim it at a later point. It's like lending with the intention of taking back the asset.
Remainders: These are interests in an estate that become effective in the future, after another interest has terminated. For example, a parent could set up a trust where one child receives income for life (life estate), and another child receives the remainder after the first child's death.
Trust Income Interests with Mandatory Accumulation: In certain trusts, income may be required to be accumulated over time and not distributed until a specified future date or event, based on the trustee’s discretion.
Present Interests without Ascertainable Value: These are gifts that technically provide a present benefit but their value cannot be readily determined. This can make them difficult to classify for tax purposes.
Present interest gifts are those where the recipient can immediately use, enjoy, or benefit from the gift. Examples include direct gifts of cash or property, trust income interests requiring annual or more frequent distributions, life estates (right to use property without owning it), estates for a set term, bonds or notes (even if interest is payable later), and unrestricted transfers of life insurance policies.
Present interest gifts are a key concept in estate and gift planning, where the recipient has an immediate and unrestricted right to the use, possession, or enjoyment of the property or income from the property. They include:
Outright Gifts of Cash or Property: These are straightforward transfers where the recipient can immediately use the cash or property.
Trust Income Interests with Mandatory Annual or More Frequent Distribution: In this case, a trust is set up where the beneficiary is entitled to receive income at least annually.
Life Estates: This is an arrangement where someone has the right to use a property during their lifetime, but they do not own the property itself.
Estates for a Term Certain: This refers to an interest in an asset for a specific period.
Bonds or Notes: Even though the interest on these financial instruments is paid at maturity, they are considered present interests as the ownership of the bond or note is immediate.
Unrestricted Transfers of Life Insurance Policies: This involves transferring the ownership of a life insurance policy without any restrictions.
Gifts are categorized as either complete or incomplete for tax purposes. A gift is considered complete, and thus subject to gift tax and eligible for the annual gift tax exclusion, even if the recipient (donee) is not yet born (as long as their identity can be determined later), and even if there's a possibility that the property might revert to the giver (donor) in the future.
Recipient Not Yet Born: A gift can be deemed complete even if the donee is not yet born, provided there's a mechanism in place to ascertain their identity later. This is common in estate planning where future beneficiaries (like unborn grandchildren) are included.
Potential Reversion to Donor: Even if there's a clause allowing the property to revert back to the donor under certain conditions, the gift can still be considered complete. This is because the initial transfer fully and irrevocably shifts control and rights away from the donor.
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