It is a well known fact that, between 1 January and 31 December each year, a person may make gifts on a gift tax-free basis in cash or property not to exceed $10,000 to as many recipients as he desires. This means that you would be able to gift up to $10,000 worth of assets to 1000 different people during this year, with the total gifts amounting to $10,000,000, without having to file a federal gift tax return; in addition those gifts would not wind up being subjected to estate tax upon your death. The only exceptions that would apply would be if death occurred within three years of gifting policies of life insurance that insured your life or if you make a gift of a life estate.

Even lesser known, but equally important, is that with basically two exceptions, only gifts of a present interest qualifies for the $10,000 annual exclusion provided to taxpayers in accordance to the provisions of Section 2503(b) of the Internal Revenue Code of 1986. As a result, you generally cannot make gifts to an irrevocable trust that will escape gift tax and estate tax inclusion.

An Irrevocable Gift Trust (Irrevocable Gift Trust) is an irrevocable trust specifically structured so that gifts to that trust qualify as gifts of a present interest and, consequently, will not be treated as taxable gifts. The trust agreement has to provide that one or more beneficiaries of the Irrevocable Gift Trust have the power to demand a distribution of the assets gifted to the Irrevocable Gift Trust within a sensible period of time (usually 30 days) after such beneficiary receives notice from the trustee that a gift was made to the Irrevocable Gift Trust. The withdrawal notice provided to the beneficiary will lapse after the expiration of the thirty day period.

For instance, if the creator of an Irrevocable Gift Trust gifts $30,000 to the Trust, and if the terms of the trust agreement that created the IGT require the trustee to provide three beneficiaries of the Irrevocable Gift Trust with notice that the gift was made and that each such beneficiary has power to withdraw up to $10,000 for a period of thirty days from the date each beneficiary received notice from the trustee of the gift to the Irrevocable Gift Trust, the gift l qualifies as a present interest gift with no estate or gift tax consequences. If no beneficiaries exercise their respective withdrawal power, the assets gifted to the Irrevocable Gift Trust remain in the trust and will be invested by the trustee for the beneficiaries’ benefit. The full $30,000 gift to the Irrevocable Gift Trust will not be subjected to the gift tax, nor included in the donor's estate when the donor dies, by virtue of the annual exclusion accredited to the three withdrawal beneficiaries, assuming that the donor makes no other gifts during the calendar year to any of those three individuals.

An important thing to consider when creating an Irrevocable Gift Trust is to determine who the trustee will be. Although the trust’s creator can serve as the trustee or co-trustee for purposes of administering the Irrevocable Gift Trust, including making decisions relative to the investment of the trust assets, there should also be a co-trustee who is able to exercise discretion relative to making distributions during the term of the Irrevocable Gift Trust. In addition, it is important the trustee or co-trustee be either an individual or corporate entity having experience in administering trusts and who will likely maintain adequate records establishing the written withdrawal notices have been timely furnished to beneficiaries having the power to demand withdrawals of gifts made to the Irrevocable Gift Trust. Quite often, friends and family members are not meticulous in maintaining the records necessary to establish that there has been compliance with the terms of the trust agreement. As a result, you may consider using a trusted professional advisor or a corporate fiduciary, such as bank trust department or a trust company, as the trustee, or as a co-trustee with a friend or family member. If the Irrevocable Gift Trust becomes the owner of a policy of life insurance, the insured under the life insurance policy should never serve as the trustee or a co-trustee.

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