A donor transfers property into a revocable trust for the benefit of their child. The donor retains the right to change beneficiaries. In Year 1, the trust income of $5,000 is paid to the child. What are the gift tax implications for Year 1?

Answer options:

The transfer of property to the trust is a completed gift.

No gift occurs because the trust is revocable.

The $5,000 income payment is a completed gift from the donor to the child.

The income is taxable to the child but not a gift.

How to approach this question

Distinguish between the trust corpus (incomplete gift if revocable) and distributions (completed gift when paid).

Full Answer

C.The $5,000 income payment is a completed gift from the donor to the child.✓ Correct

Treas. Reg. §25.2511-2. The transfer to the revocable trust is not a completed gift because the donor retains dominion and control. However, when income is actually distributed to a beneficiary, the donor has parted with dominion over that money, making it a completed gift at that time.

Common mistakes

Assuming the initial transfer was the gift or that no gift ever occurs.

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