What Is a Completed Gift and How Does It Affect Taxes?

Giving assets or money to another person may seem straightforward, but for tax purposes, not all gifts are treated the same. The IRS distinguishes between “completed” and “incomplete” gifts, which determines whether they are subject to gift tax rules. Understanding this distinction is important for estate planning and minimizing tax liabilities.

A completed gift means the giver has fully transferred ownership and control without retaining any rights. This classification affects whether the value of the gift is counted toward annual exclusions, lifetime exemptions, or taxable amounts.

Legal Criteria for Completion

For a gift to be considered complete for tax purposes, specific legal conditions must be met. The IRS evaluates three primary factors: the donor’s intent, the actual transfer of the gift, and the recipient’s acceptance. Each element must be satisfied to ensure the transfer is final and enforceable.

Intent

The donor must intend to relinquish ownership without expecting repayment or compensation. The transfer cannot be conditional or dependent on future events. Intent is assessed based on the donor’s actions, statements, and documentation.

In Commissioner v. Wemyss (1945), the Supreme Court ruled that a transfer made in contemplation of marriage was still subject to gift tax, reinforcing that intent is a defining factor. While verbal confirmation can indicate intent, formal documentation, such as a written agreement or notarized statement, strengthens the case. If intent is unclear, the IRS may classify the transfer as incomplete, meaning it remains part of the donor’s taxable estate.

Delivery

The gift must be physically or legally transferred to the recipient. Delivery can take various forms, such as handing over cash, transferring stock ownership, or changing the title on real estate or vehicles. For intangible assets like securities, delivery is established when the donor signs over control through a brokerage transfer or updates legal ownership records.

In Burnet v. Guggenheim (1933), the Supreme Court emphasized that a donor must fully part with possession and the ability to revoke the gift. If the donor retains control over how or when the recipient can use the asset, the IRS may argue that delivery was incomplete. For large gifts, such as real estate or valuable artwork, proper documentation like a deed transfer or bill of sale is necessary.

Acceptance

The recipient must willingly take possession of the gift. Acceptance is generally presumed unless there is evidence to the contrary, particularly when the gift benefits the recipient. However, if a gift comes with financial obligations, such as property with outstanding taxes or maintenance costs, the recipient may refuse it.

In Edson v. Lucas (1930), courts ruled that explicit rejection nullifies the transfer, meaning the asset remains part of the donor’s estate. Written confirmation from the recipient, such as a signed acknowledgment, can prevent disputes. If a recipient later tries to disclaim a gift for tax reasons, they must follow IRS disclaimer rules under Section 2518 of the Internal Revenue Code, which requires a formal written refusal within nine months of the transfer.

Irrevocable Transfers in Trust

Placing assets into an irrevocable trust ensures that a gift is legally complete, removing it from the donor’s estate for tax purposes. Once assets are transferred, the donor relinquishes control and can no longer alter terms, reclaim property, or modify beneficiary designations.

A properly structured irrevocable trust can provide tax advantages. Assets in an irrevocable trust are generally not subject to estate tax upon the donor’s passing. Additionally, if the trust generates income, tax liability may shift to the beneficiaries rather than the original owner, depending on the trust’s provisions.

Certain irrevocable trusts offer additional benefits. A Grantor Retained Annuity Trust (GRAT) allows the donor to transfer appreciating assets while retaining a fixed annuity for a set period. If structured correctly, any appreciation beyond the IRS’s Section 7520 assumed rate passes to beneficiaries free of gift tax. Charitable Remainder Trusts (CRTs) enable donors to contribute assets, receive income for life, and eventually pass the remainder to a qualified charity, potentially securing an immediate charitable deduction.

Retained Interests and Rights

When a donor transfers assets but retains certain rights or benefits, the IRS may classify the gift as incomplete. This typically occurs when the original owner maintains control over income generated by the asset, the ability to alter beneficiaries, or the right to reclaim the property under specific conditions. These retained interests can result in the asset remaining part of the donor’s taxable estate.

One common example involves gifts of real estate where the donor retains a life estate, meaning they continue to live in the property while transferring future ownership to heirs. Under Section 2036 of the Internal Revenue Code, assets transferred with a retained life interest are still included in the donor’s estate for tax calculations. This can lead to higher estate tax liabilities if the property has appreciated significantly.

Similarly, if a donor places assets into a trust but keeps the right to receive income from it, the IRS may argue that the transfer was not fully completed, potentially subjecting the trust assets to estate tax upon the donor’s passing.

Retained interests also impact business succession planning. A business owner who gifts shares in a family corporation but retains voting rights or decision-making authority may not have completed the transfer in the eyes of the IRS. This can affect valuation discounts that might otherwise reduce gift tax liability. Section 2701 governs valuation rules for transfers involving family-controlled entities. If the retained control is deemed excessive, the IRS may disregard valuation discounts, increasing the taxable value of the gift.

Powers of Appointment

A power of appointment grants an individual the authority to determine how certain property or assets will be distributed, often within a trust or estate plan. The extent of this authority depends on whether the power is classified as general or limited, with tax and legal implications tied to each designation.

A general power of appointment gives the holder broad discretion, allowing them to allocate assets to themselves, their estate, creditors, or anyone they choose. The IRS treats this as a form of ownership, meaning that if the powerholder dies before exercising the power, the assets subject to it may be included in their taxable estate under Section 2041 of the Internal Revenue Code.

A limited—or special—power of appointment restricts the holder’s choices to a predefined group of beneficiaries, excluding themselves, their estate, or their creditors. This limitation can prevent the assets from being taxed as part of the powerholder’s estate while still permitting strategic distribution based on family circumstances or changing financial needs.

Impact on Gift or Estate Tax

Determining whether a gift is complete affects both gift and estate tax liabilities. The IRS imposes a federal gift tax on transfers where full ownership has been relinquished, while incomplete gifts remain part of the donor’s taxable estate.

The federal gift tax applies to completed gifts exceeding the annual exclusion amount, which is $18,000 per recipient in 2024. Any amount above this threshold reduces the donor’s lifetime exemption, currently set at $13.61 million. If a donor exceeds this exemption over their lifetime, they must pay gift tax at rates ranging from 18% to 40%.

Married couples can use gift-splitting, allowing each spouse to use their annual exclusion to give up to $36,000 per recipient without affecting their lifetime exemption. Additionally, certain transfers, such as payments made directly for medical expenses or tuition, are excluded from gift tax altogether. Proper documentation and strategic planning help ensure that gifts are classified correctly and do not unintentionally trigger tax consequences.

Required Documentation

Proper documentation is necessary to substantiate that a gift has been completed and to prevent disputes with the IRS. Without clear records, tax authorities may challenge whether ownership was fully transferred, potentially reclassifying the gift as incomplete and subjecting it to estate tax.

For financial assets, documentation includes transfer records, such as brokerage statements for stock gifts or bank records for cash transfers. Real estate gifts require a recorded deed showing the change in ownership, while personal property, such as artwork or collectibles, may necessitate a bill of sale or an appraisal to establish fair market value.

Gift tax returns (Form 709) must be filed for any transfer exceeding the annual exclusion amount, providing details on valuation, recipient information, and any applicable deductions. If a donor utilizes valuation discounts for business interests or fractional ownership, supporting appraisals must be included to justify the reported value. Failure to maintain proper records can result in IRS audits, penalties, or reclassification of the gift, leading to unexpected tax liabilities.