When Trust Transfers Are Completed Gifts
Federal gift tax rules describe completed trust gifts, and retained interests relate to estate inclusion. IRS rulings on trustee discretion and settlor interests for U.S. citizens are summarized below.
When a trust transfer is a completed gift
A trust transfer is complete for gift tax purposes when the donor gives up dominion and control and has no power to change the property's disposition. Under the gift tax regulations, a transfer subject to a reserved power may be wholly or partly incomplete, depending on the power's terms and scope.[2]
A reserved power to return beneficial title to the donor makes the gift incomplete. A power to name beneficiaries or change their interests also makes the gift incomplete to the extent of that power, unless it is a fiduciary power limited by a fixed or ascertainable standard.[2]
The regulation distinguishes changing who receives property from changing when or how a recipient enjoys it. A donor's limited power to change the manner or time of enjoyment does not, by itself, make the gift incomplete.[2]
If the donor serves as trustee, the gift is complete when the donor keeps no beneficial interest and any power to change beneficiaries is a fiduciary power limited by a fixed or ascertainable standard.[2]
Transfers to a trust may be completed gifts for federal gift tax purposes, and the assets moved in become trust property.[1]
Retained interests and estate inclusion
A completed gift does not by itself resolve whether trust property is included in the transferor's estate. Estate inclusion may apply when the transferor retains use, enjoyment, or income until death, including through a right to mandatory distributions.[1][4]
A settlor's discretionary beneficial interest may also affect estate inclusion, depending on applicable law and the trust's terms. The question turns on the maximum amount the trustees can pay to or apply for the settlor's benefit.[4]
Gift completion concerns whether the donor can change the property's disposition, while estate inclusion concerns retained use, enjoyment, income, or other interests.[1][2]
What IRS rulings say
The IRS treated a transfer to an Alaska self-settled trust as a completed gift even though the settlor was a discretionary beneficiary. That ruling did not decide whether the trust property would be included in the settlor's gross estate.[4]
Revenue Ruling 2004-64 addresses discretionary reimbursement for income tax paid on trust income. The trustee's discretion alone, whether exercised or not, did not cause estate inclusion, while an understanding or prior arrangement could affect the result.[4]
Questions and answers
What makes a trust transfer a completed gift?
A gift is complete when the donor has given up dominion and control and has no power to change the property's disposition. A reserved power can leave all or part of the gift incomplete, depending on its scope.[2]
Can a retained power make a gift incomplete?
Yes. A power to revest beneficial title in the donor makes a gift incomplete. Powers over beneficiary identities or their respective interests may also make it incomplete, subject to the regulation's fiduciary-power exception.[2]
Does a completed gift rule out estate inclusion?
No. Trust property may be included in the transferor's estate if the transferor retains use, enjoyment, or income until death. Gift completion and estate inclusion are distinct questions.[1]
What did Revenue Ruling 2004-64 say about discretionary reimbursement?
Revenue Ruling 2004-64 says discretion to reimburse the settlor for income tax paid on trust income did not alone cause estate inclusion. It also states that additional facts, including an understanding or prior arrangement, may affect inclusion.[4]
Related resources
Related glossary terms
- Reserved powers: Reserved powers are rights a settlor keeps, or gives to another person, under a trust. Trust laws address their validity and timing, and administration.
- Foreign gift: A foreign gift is a gift or bequest received from a foreign person or estate. Certain receipts may require a U.S. person to report them on Form 3520, Part IV.
Related articles and guides
- How Trust Property Is Held Separately: A reference for U.S. citizens on how trust laws describe property held by trustees for beneficiaries or purposes, separate from the trustee's own estate.
- Rev. Rul. 2008-40, Foreign Trust Transfers: Rev. Rul. 2008-40 is an IRS ruling on transfers from certain qualified retirement plans to foreign trusts and Puerto Rico plans, and income inclusion.
Tools and official documents
- Form 709: federal gift and GST tax return: Form 709 is the federal gift tax return, also used for generation-skipping transfers: reportable gifts, definitions, documents, related forms and filing.
Related pages
Sources and data notes
- irs.gov, Notice 97-24, Certain Trust Arrangements (1997). https://www.irs.gov/pub/irs-drop/pub_n_97.24.pdf. Retrieved .
- law.cornell.edu, 26 CFR § 25.2511-2, Cessation of donor's dominion and control. https://www.law.cornell.edu/cfr/text/26/25.2511-2. Retrieved .
- floridalawreview.com, John K. Eason, Home from the Islands: Domestic Asset Protection Trust Alternatives, Florida Law Review (2000). https://www.floridalawreview.com/article/80234.pdf. Retrieved .
- ACTEC Foundation, podcast on estate tax planning and domestic trusts. actecfoundation.org, podcast page. Retrieved .
- shaftellaw.com, Domestic Asset Protection Trusts Created by Nonresident Settlors. https://shaftellaw.com/docs/article_23.pdf. Retrieved .
- greshampartners.com, Kim Kamin and Kristen Hosack Pace, Domestic Asset Protection Trusts (2018). https://greshampartners.com/wp-content/uploads/Domestic-Protection-Trusts-Chapter-10.pdf. Retrieved .
Dates in this block record when each source was read for this page.