[Code of Federal Regulations]
[Title 26, Volume 14]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR25.2503-3]

[Page 528-529]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 25_GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954--Table of Contents
 
Sec.  25.2503-3  Future interests in property.

    (a) No part of the value of a gift of a future interest may be 
excluded in determining the total amount of gifts made during the 
``calendar period'' (as defined in Sec.  25.2502-1(c)(1)). ``Future 
interest'' is a legal term, and includes reversions, remainders, and 
other interests or estates, whether vested or contingent, and whether or 
not supported by a particular interest or estate, which are limited to 
commence in use, possession, or enjoyment at some future date or time. 
The term has no reference to such contractual rights as exist in a bond, 
note (though bearing no interest until maturity), or in a policy of life 
insurance, the obligations of which are to be discharged by payments in 
the future. But a future interest or interests in such contractual 
obligations may be created by the limitations contained in a trust or 
other instrument of transfer used in effecting a gift.
    (b) An unrestricted right to the immediate use, possession, or 
enjoyment of property or the income from property (such as a life estate 
or term certain) is a present interest in property. An exclusion is 
allowable with respect to a gift of such an interest (but not in excess 
of the value of the interest). If a donee has received a present 
interest in property, the possibility that such interest may be 
diminished by the transfer of a greater interest in the same property to 
the donee through the exercise of a power is disregarded in computing 
the value of the present interest, to the extent that no part of such 
interest will at any time pass to any other person (see example (4) of 
paragraph (c) of this section). For an exception to the rule disallowing 
an exclusion for gifts of future interests in the case of certain gifts 
to minors, see Sec.  25.2503-4.
    (c) The operation of this section may be illustrated by the 
following examples:

    Example (1). Under the terms of a trust created by A the trustee is 
directed to pay the net income to B, so long as B shall live. The 
trustee is authorized in his discretion to withhold payments of income 
during any period he deems advisable and add such income to the trust 
corpus. Since B's right to receive the income payments is subject to the 
trustee's discretion, it is not a present interest and no exclusion is 
allowable with respect to the transfer in trust.
    Example (2). C transfers certain insurance policies on his own life 
to a trust created for the benefit of D. Upon C's death the proceeds of 
the policies are to be invested and the net income therefrom paid to D 
during his lifetime. Since the income payments to D will not begin until 
after C's death the transfer in trust represents a gift of a future 
interest in property against which no exclusion is allowable.
    Example (3). Under the terms of a trust created by E the net income 
is to be distributed to E's three children in such shares as the 
trustee, in his uncontrolled discretion deems advisable. While the terms 
of the trust provide that all of the net income is to be distributed, 
the amount of income any one of the three beneficiaries will receive 
rests entirely within the trustee's discretion and cannot be presently 
ascertained. Accordingly, no exclusions are allowable with respect to 
the transfers to the trust.
    Example (4). Under the terms of a trust the net income is to be paid 
to F for life, with the remainder payable to G on F's death. The trustee 
has the uncontrolled power to pay over the corpus to F at any time. 
Although F's present right to receive the income may be terminated, no 
other person has the right to such income interest. Accordingly, the 
power in the trustee is disregarded in determining the value of F's

[[Page 529]]

present interest. The power would not be disregarded to the extent that 
the trustee during F's life could distribute corpus to persons other 
than F.
    Example (5). The corpus of a trust created by J consists of certain 
real property, subject to a mortgage. The terms of the trust provide 
that the net income from the property is to be used to pay the mortgage. 
After the mortgage is paid in full the net income is to be paid to K 
during his lifetime. Since K's right to receive the income payments will 
not begin until after the mortgage is paid in full the transfer in trust 
represents a gift of a future interest in property against which no 
exclusion is allowable.
    Example (6). L pays premiums on a policy of insurance on his life, 
all the incidents of ownership in the policy (including the right to 
surrender the policy) are vested in M. The payment of premiums by L 
constitutes a gift of a present interest in property.

[T.D. 6334, 23 FR 8904, Nov. 15, 1958, as amended by T.D. 7238, 37 FR 
28727, Dec. 29, 1972; T.D. 7910, 48 FR 40373, Sept. 7, 1983]