A client wires $100,000 to a grandchild's trust and assumes silence is safe because no tax is due. Two separate transfer taxes and one return say otherwise.
The federal gift tax is a tax on property a person gives away while alive. Under IRC 2501, it applies to a completed, gratuitous transfer of property by an individual donor during life: the donor has fully let go of the property and didn't get fair value back. The donor, not the recipient, owes the tax and files any required Form 709.
The gift tax looks at the objective facts of a transfer, not the donor's motive, so donative intent isn't required. A transfer is a taxable gift when four elements are present:
- Not a business deal: the transfer isn't pay for services or an arm's-length exchange, where each side bargains for fair value.
- Delivery: the donor parts with dominion and control over the property, so the donor can no longer use it or take it back.
Common mistakes
- Treating the annual exclusion as per donor. Candidates cap a donor's total 2025 giving at $19,000. The exclusion is $19,000 per donee, so ten donees means $190,000 excluded.
- Filing a joint Form 709. There's no such return. When both spouses in a gift split must file, each files their own return, and each signs the other's consent.
- Giving a trust gift the exclusion automatically. Without a Crummey power, a $19,000 trust contribution is a future interest. It gets zero exclusion, and a return is mandatory.
Bottom line
- Annual exclusion: $19,000 per donee for 2025, present interests only; $190,000 for a non-citizen spouse.
- 2025 lifetime exemption: $13.99M per donor (credit equivalent $5,541,800), shared by gift and estate tax.
- Gift-splitting: doubles shelter to $38,000 per donee, requires marriage at gift date, applies to all gifts that year, and requires a Form 709 from each spouse unless only one spouse made gifts and the one-return exception applies.
- Direct payments of tuition and medical expenses to the institution or provider are unlimited and unreported.
Exam shortcut
Run every gift question through one four-step order: exclude (tuition, medical, spouse, charity), then apply the $19,000 annual exclusion, then split if both spouses consented, then apply the unified credit. Stem signals worth spotting instantly. "Paid directly to the university" means fully excluded and off the return. "Irrevocable trust" with no withdrawal right means future interest, so exclusion zero and return required.
The full lesson (about 3,213 words, 21 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
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