What Is Gift Tax?
A federal tax on the transfer of property or assets from one person to another during their lifetime without receiving full value in return, relevant to life insurance premium payments and policy transfers.
Understanding Gift Tax
The gift tax is a federal tax imposed on the transfer of money or property from one person (the donor) to another (the donee) during the donor's lifetime, when the transfer is made without receiving adequate compensation in return. The gift tax exists alongside the estate tax as part of the unified transfer tax system, sharing the same lifetime exemption amount (approximately $13 million per individual). There is also an annual gift tax exclusion (approximately $18,000 per recipient per year as of current law) that allows tax-free gifts below this threshold without reducing the lifetime exemption.
Gift tax considerations arise frequently in life insurance planning. When a policy owner pays premiums on a policy owned by an irrevocable life insurance trust (ILIT), the premium payment is considered a gift to the trust beneficiaries. If the annual premium exceeds the gift tax annual exclusion (multiplied by the number of trust beneficiaries), the excess may count against the donor's lifetime exemption. To address this, ILITs typically include "Crummey powers," which give trust beneficiaries a temporary right to withdraw contributions, qualifying the premium payments as annual exclusion gifts.
Transferring an existing life insurance policy to another person or trust is also a taxable gift. The gift value is generally the policy's fair market value at the time of transfer, which for permanent policies is approximately equal to the interpolated terminal reserve plus unearned premium. For policies with little or no cash value, such as new term policies, the gift value may be minimal. Gifts of policies to ILITs must be made more than three years before the insured's death to successfully remove the death benefit from the taxable estate.
Proper compliance with gift tax rules requires careful documentation. Any gift exceeding the annual exclusion (or any gift to a trust without sufficient Crummey powers) requires the donor to file IRS Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) for the year of the gift, even if no gift tax is owed because the lifetime exemption has not been exhausted. Failure to file required gift tax returns can complicate later estate tax proceedings and result in penalties. For Tennessee residents using life insurance in ILIT-based estate plans, agents in our network coordinate with estate attorneys and CPAs to ensure annual Crummey notices are properly sent and gift tax returns are filed when required, preserving the planned tax benefits.
Important Things to Know
The annual gift tax exclusion allows tax-free gifts up to approximately $18,000 per recipient per year (adjusted for inflation).
Married couples can elect gift splitting, effectively doubling the exclusion to $36,000 per recipient per year.
Premium payments on ILIT-owned policies are considered gifts to the trust beneficiaries.
Crummey powers in ILITs qualify premium payments as annual exclusion gifts by giving beneficiaries temporary withdrawal rights.
Transferring an existing policy to another person or trust is a taxable gift based on the policy's fair market value.
Policy transfers to ILITs must occur more than three years before death to exclude the death benefit from the estate under IRC Section 2035.
Gifts above the annual exclusion or to trusts without Crummey powers may require filing IRS Form 709.
The gift tax shares the same lifetime exemption as the estate tax (approximately $13 million per individual, subject to change).
Seeing Gift Tax in Practice
Illustrative example: A 60-year-old Memphis executive establishes an ILIT with three beneficiaries (his three adult children) to own a $2 million whole life policy. The annual premium is $45,000. Because each beneficiary has a Crummey withdrawal right, up to $54,000 per year ($18,000 x 3 beneficiaries) qualifies for the annual gift tax exclusion. The full $45,000 annual premium is covered by the exclusion, so no lifetime exemption is used and no gift tax is owed. This example is illustrative only; actual gift tax calculations depend on current law and individual circumstances. In a second illustrative scenario, a 65-year-old Nashville couple gifts $50,000 to each of their four adult children to fund a family vacation fund. Using gift splitting, each spouse is treated as gifting $25,000 to each child. With the annual exclusion at approximately $18,000 per donor per recipient, $7,000 of each spouse's gift to each child ($25,000 minus $18,000) is reportable on Form 709 and counts against their lifetime exemption. No actual gift tax is owed because the lifetime exemption has not been exhausted, but the gift tax return must be filed to track the use of exemption. Actual outcomes depend on current law and circumstances.
Gift Tax in Tennessee
Tennessee does not impose a state gift tax, so Tennessee residents are subject only to the federal gift tax rules. This is particularly advantageous for affluent Tennessee families who use life insurance and ILIT strategies for wealth transfer. Tennessee's favorable trust laws, including the ability to establish dynasty trusts with extended perpetuities (up to 360 years), complement gift tax planning with life insurance. Under TCA Title 56, agents advising on insurance products in trust arrangements must be properly licensed. In practice, agents in our network coordinate with Tennessee estate planning attorneys to ensure proper gift tax compliance for ILIT-funded life insurance. This includes structuring the trust with appropriate Crummey powers, sending timely Crummey notices to beneficiaries each year, and ensuring annual premium funding stays within the available annual exclusion (or properly using lifetime exemption when needed). For Tennessee couples, gift splitting can effectively double the available exclusion. The combination of Tennessee's favorable trust environment, no state gift or estate tax, and federal gift tax planning makes Tennessee one of the most efficient jurisdictions for life insurance-funded wealth transfer.
Explore Gift Tax in Detail
Get answers to specific questions about gift tax.
Related Glossary Terms
Estate Tax
A federal tax imposed on the transfer of a deceased person's estate when the total value exceeds the applicable exemption amount, which can be mitigated through life insurance and trust planning.
Read Definition →Irrevocable Life Insurance Trust (ILIT)
A trust specifically designed to own a life insurance policy, removing the death benefit from the insured's taxable estate while providing structured distribution of proceeds to beneficiaries.
Read Definition →Annual Exclusion
The maximum amount that can be gifted to any individual each year without incurring gift tax or reducing the lifetime gift and estate tax exemption, currently approximately $18,000 per recipient.
Read Definition →Generation-Skipping Transfer (GST) Tax
A federal tax imposed on transfers of wealth to beneficiaries who are two or more generations below the transferor, designed to prevent families from avoiding estate tax at each generation.
Read Definition →Frequently Asked Questions About Gift Tax
If you pay the premium on a policy owned by another person or trust, the payment is considered a gift to the policy owner or trust beneficiaries. If the annual premium is below the gift tax annual exclusion amount per recipient, no gift tax is owed and no gift tax return is required. Premiums above the exclusion count against your lifetime exemption.
Crummey powers are provisions in an ILIT that give trust beneficiaries a temporary right (usually 30 days) to withdraw contributions made to the trust. This withdrawal right transforms the contribution from a "future interest" gift (which does not qualify for the annual exclusion) into a "present interest" gift (which does qualify). Beneficiaries almost never exercise the withdrawal right.
No. Tennessee does not impose a state gift tax. Tennessee residents are subject only to the federal gift tax rules, which include the annual exclusion and the lifetime exemption. This makes Tennessee a favorable jurisdiction for gift-based wealth transfer strategies.
You must file IRS Form 709 (Gift Tax Return) for any year in which you make gifts to one recipient that exceed the annual exclusion amount, or if you make gifts to a trust that does not qualify for the annual exclusion. The return is due April 15 of the year following the gift. Even if no gift tax is owed because the lifetime exemption has not been exhausted, the return is required to track the use of exemption.
Crummey notices are written notifications sent to ILIT beneficiaries informing them of their temporary right (typically 30 days) to withdraw their share of a recent contribution. These notices are essential to qualify the contribution as a present interest gift eligible for the annual gift tax exclusion. The trustee should send Crummey notices each time a contribution is made and retain documentation showing they were properly sent and received.
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