Does Funding an Irrevocable Trust Mean Paying Gift Tax?

Marcus's situation: a $1.2 million portfolio and a big question

Marcus is 64, lives in Winter Park, and owns a rental portfolio worth about $1.2 million that he has built over three decades. He wants to move those properties into an irrevocable trust for his three adult children, both to organize his estate and to start shifting future appreciation out of his name. Marcus is a composite I use to illustrate this issue, not an actual client, but his numbers are realistic for a lot of Florida landlords and retirees who come to my office asking the same question: when I sign that deed over to the trustee, do I owe the IRS a check?

An irrevocable trust is one the person who creates it cannot simply revoke or amend on their own, and that loss of control is exactly what allows the assets to move out of his taxable estate for creditor and tax planning purposes. But moving assets out of his estate has a tax label attached to it, and that label is gift. Understanding how that gift is measured, reported, and absorbed is the whole ballgame.

Completed gift or incomplete gift: which one did Marcus make?

The first question the IRS asks is whether a transfer to a trust is a completed gift. A gift is complete when the donor has given up dominion and control over the property, meaning he can no longer change who benefits or take it back. If Marcus's trust is a straightforward irrevocable trust naming his three children as beneficiaries, with no strings letting him redirect the property or reclaim it for himself, the transfer of the rental portfolio is a completed gift the moment the deeds are recorded in the trustee's name.

Some irrevocable trusts are drafted so the settlor retains certain powers, such as the ability to change beneficiaries among a defined class, and those retained powers can make a transfer incomplete for gift tax purposes even though the trust is irrevocable under Florida law. That distinction matters because incomplete gifts are not reported the same way and do not use up exemption until they later become complete. This is a drafting-specific question, and it is one reason the terms of the trust document, not just the label "irrevocable," determine the tax outcome.

The annual exclusion and why Crummey powers matter

Every year, federal law lets a person give a certain amount to each recipient without touching the lifetime exemption at all, as long as the gift is of a present interest, meaning the recipient can enjoy or use it right away. Gifts to most irrevocable trusts do not naturally qualify for this annual exclusion, because the children cannot touch trust property immediately; it is tied up under the trustee's management and the trust's distribution terms.

To fix that, many irrevocable trusts include a Crummey withdrawal power, named for the court case that approved the technique. A Crummey power gives each beneficiary a limited window, often thirty days, to withdraw their share of a new contribution to the trust. Because the beneficiary has the legal right to pull the money out, the IRS treats the contribution as a present interest gift eligible for the annual exclusion, even if the beneficiary never actually exercises the withdrawal right and the funds stay in the trust. If Marcus's trust includes Crummey powers for his three children, a portion of each year's contribution can be sheltered by the annual exclusion for each child before any exemption is used at all.

Marcus's $1.2 million transfer happened in one lump sum, so the annual exclusion covers only a small slice of it. The rest of the gift has to be measured against his lifetime exemption.

The lifetime exemption and Form 709: why almost no one pays gift tax but many must file

Every person has a very large lifetime amount they can give away, during life or at death, before any federal gift or estate tax is actually owed. That number changes periodically with new tax legislation and inflation adjustments, and it has recently been set at a historically high level under a 2025 federal law, but I will not print a specific dollar figure here because these amounts are legislated and adjusted, and readers should confirm the current figure with their attorney or CPA before relying on it for planning.

Here is the practical point for Marcus: because the lifetime exemption is so large, a $1.2 million gift to his children's trust will not come close to exhausting it. He will not write a gift tax check. But the exemption is not automatic. It has to be claimed and tracked, and that happens on IRS Form 709, the United States Gift Tax Return. Because Marcus's gift exceeds the annual exclusion amount available for each child, he is required to file Form 709 for the year of the transfer, due on the same schedule as his individual income tax return, even though no tax is due. The return reports the value of the gift, applies the annual exclusion to whatever portion qualifies, and applies the remainder against his lifetime exemption. Filing also starts the clock on the IRS's limited window to challenge the value he reported.

Valuation, appraisals, and generation-skipping allocation

Because Marcus is transferring real estate, not cash, the value of the gift is not simply what he paid for the properties years ago. It is their fair market value on the date of transfer, and for a $1.2 million rental portfolio, that figure should be supported by a qualified appraisal. A solid appraisal protects Marcus if the IRS ever questions the numbers on his Form 709, and it is standard practice whenever real property or a business interest moves into an irrevocable trust.

If Marcus's trust is drafted only for his three children, generation-skipping transfer tax generally is not a concern, since his children are one generation below him. GST tax and a separate exemption allocation become relevant only when a trust benefits grandchildren or others two or more generations younger. If Marcus later adds his grandchildren as beneficiaries, or restructures the trust that way, that allocation would need to be addressed separately on the same Form 709.

This article is for general informational purposes only and does not constitute legal advice, nor does reading it create an attorney-client relationship. Florida estate, elder, probate, and real estate law are fact-specific and change over time. Consult a licensed Florida attorney about your individual circumstances. Arthur Simpson, Esq. is licensed to practice law in the State of Florida. Attorney advertising.