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2011 changes in gift tax encourage large-scale giving

In our previous post, we began discussing the changes in the gift and estate tax system for 2011 and 2012. Here we continue that discussion.

Beyond the financial and political considerations of making large gifts over the next two years, there are certain emotional issues that are wise to consider before taking advantage of the current tax regime. In particular, there is the question of how much control one is willing to relinquish over one's assets. As one Virginia attorney warns, "You will not get the money back, your heirs won't write you a thank-you note, and you won't approve of how they spend the money."

Some who are otherwise capable of making large gifts to their children choose not to do so in order that their children might not get too comfortable. Others wishing to take full advantage of the current tax system do well to keep a few things in mind.

First, it is unclear what will happen to gifts made now should the exemption amount be reduced in the future. Congress may by some measure choose to grandfather past gifts to accord with future changes, or may choose to tax gifts greater than the exemption amount at the time of the donor's death.

Second, it is important to remember that the recipient of a gift will also inherit the giver's original "cost basis" for the asset, meaning that the recipient will owe income tax on the gift at the highest rates starting at a very low level.

Third, one drawback of large-scale gifting is that most people who do so end up leaving the assets in a trust, and often up needing to hire an institution to act as trustee. Institutional trustees may charge weighty fees and are more cumbersome in administrative decision-making.

A final thing to keep in mind is that strategizing large-scale gifting can become very complex, and it is wise to work closely with an attorney to ensure that your goals are met and that you receive all the benefits available to you.

Source: The Wall Street Journal, "The $5 Million Tax Break," Anne Tergesen and Laura Saunders, 29 Jan 2011.

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