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GIVING SEASON ENDS DECEMBER 31 AND STARTS JANUARY 1

November 22, 2005

It doesn't look like the estate tax is going away anytime soon. If you're fortunate enough to have an estate tax problem, an important estate planning opportunity will expire when the ball hits at Times Square. We're speaking, of course, of your 2005 annual gift tax exemption. Each year you fail to take advantage of the annual exemption - currently $11,000 per donor, per donee -- you have foregone forever a chance to reduce your taxable estate by that much.

The exclusion rises to $12,000 next year, but that's no excuse to waste this year's exclusion. The Death and Taxes blog shows how the savings can add up:

1. You and your spouse have three grown children. (Each child is married and has one child of his or her own.) You and your spouse each give $11,000 to each child on December 31, 2005 and $12,000 to each child on January 1, 2006. You have just given away $138,000 without having to pay gift tax or even file a return.

2. Same facts as in 1., but you also make the same gifts to each child's spouse. That's another $138,000 that you've given away without having to pay gift tax or even file a return.

3. Same facts as in 2., but you also make the same gifts to your three grandchildren. That's another $138,000 that you've given away without having to pay gift tax or even file a return.

Reducing your estate by $138,000 reduces your eventual estate tax by $62,100, assuming a 45% rate. Do that every year for 10 years, and your heirs will be $621,000 happier -- or wealthier, anyway. The benefit will actually be higher, to the extent the gifts appreciate in value after you give them away. Repeat on January 1: the sooner you give them away, the more post-gift appreciation there will be.

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