What is true regarding gifts of life insurance?

When considering gifts of life insurance, one important principle to understand is the concept of present interests. For a gift to qualify for the annual exclusion from gift tax, it must be a present interest gift. This means that the recipient has immediate rights to the benefits of the gift. Life insurance policies, when given as gifts, can qualify for the annual exclusion if the donor transfers ownership of the policy and the beneficiary can access the benefits immediately.

If the insured transfers ownership of their life insurance policy to another party, that gift can be considered a present interest. Under this scenario, the value of the gift can be excluded from taxation up to the annual exclusion limit established by the IRS for that year. This makes the option stating that the annual exclusion is available for present interest gifts the correct choice, as it recognizes the tax advantages available to donors making such gifts.

In contrast, the other options either misinterpret the tax treatment of life insurance gifts or present limitations that do not apply universally. While it is true that certain gifts may exceed limits or be considered taxable under different circumstances, the key takeaway is the relevance of present interest in determining whether the annual exclusion applies.