My understanding is that the Feds do not consider a "gift with strings attached" to be "a gift". Sure, you can do it, but if it got questioned with regards to an Estate Tax audit, I don't think it would hold up.
-ERD50
This has been litigated and the IRS lost... as long as the person the gift is being made to has the right to take out the money right now, then it is a current gift... just because they decided to not take it out does not change the first fact...
Now, if the child does decide to take the money out, you can make it very clear to them that this is all they are going to get.... ever... no more gifts, no money when the person passes.... it is a one time take it offer....
I will say that I cannot remember the name of this exception... and I cannot guarantee that it has not been repealed over the years...
EDIT..... just remembered the trust name... it is the Crummey trust...
In order for a gift to qualify for the $14,000 annual exclusion, it must be a “present interest”. This means that the beneficiary must have the immediate right to use and benefit from the gift. Absent the special characteristics of a Crummey Trust, gifts to a trust for ones future benefit will not be tax free, even if it was under $14,000. In order to meet this requirement, the Crummey Trust provides that when property is given to the trust, the beneficiary must have the right to withdraw the gift for at least 30 days. If the minor does not withdraw the gifted property, the gift property remains in the trust under the terms of the trust agreement.
So, the trust we have will distribute the funds to the kids and grand kids upon the death of mom.... but, the money is still there for her use if needed... we have it invested in an annuity that grows so no taxes or tax return are needed until death... and ours has a life insurance component to it so when she dies it is life insurance and not taxable...
Tax Free Gifts to Children & the Crummey Trust