Final answer:
Without gift-splitting, Lucy has made a taxable gift of $25,000 ($100,000 minus the $75,000 allowed by the annual exclusion). If she elects gift-splitting, there would be no taxable gift as each parent's share of $10,000 per child would fall within the annual exclusion.
Step-by-step explanation:
Lucy and Desi live in a community property state, where income and assets acquired during the marriage are considered jointly owned. Lucy gave $20,000 to each of their five children, totaling $100,000. In the United States, the IRS allows an annual exclusion for gift taxes, this exclusion amount can vary year to year, but for simplicity, let's assume it is $15,000 per recipient for the current year.
Without gift-splitting, the total taxable gift made by Lucy, ignoring the annual exclusion, would be $100,000. However, if she chooses to use the gift-splitting option, which allows spouses to treat gifts as if they were made as one-half by each, Lucy and Desi would each be considered to have made a gift of $50,000 ($10,000 per child), which then might entirely fall under the annual exclusion, depending on its limit for that year.
Therefore, with an assumed annual exclusion of $15,000 per recipient, Lucy would be able to exclude $75,000 (5 children x $15,000) from the taxable gift amount. Without gift-splitting, she would have a taxable gift of $25,000 ($100,000 - $75,000). However, if she elects gift-splitting, since each spouse's gift to the children would be $10,000, within the exclusion amount, there would be no taxable gift at all.