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Don't stop giving now!

December 26, 2008

December 26 might not be the best time to say this, but it may be a good idea for you to do some more giving.

This may seem like an odd statement. After all, estates valued up to $3.5 million will be exempt from estate tax in 2009. You may have heard that the Obama administration will propose continuing this exemption amount indefinitely. If a couple can die with $7 million tax-free, why give away anything now? Unless, of course, you are worth that much.

For starters, the current tax law provides that the estate tax goes away in 2010, only to return in 2011 with a $1 million exemption and a top rate of 50%. A lot more folks are worth $1 million than $7 million, and with inflation there will be many more. There's no guarantee that the new Congress and the new President will be any more successful than the last bunch; they've been unable to resolve the issue in 7 years of wrangling.

Also, given the current bailout fever, there will likely be tremendous pressure to raise tax revenues. Rich dead people only vote in a few major cities, so they are an easy target for tax hikes.

You can gift up to $12,000 per donor, per donee, each year without eating away at your $1 million lifetime gift exemption (yes, the gift tax exemption is much lower than the estate tax exemption). That means a couple with two kids and four grandkids can reduce their ultimate estate with $144,000 of gifts each year. Do that every years for 10 years and you've effectively increased your lifetime estate tax exemption by just shy of $1.5 million. But once you let an annual exclusion lapse, it's gone forever. Sure, you can do annual gifting in 2009 (at an increased $13,000 annual exclusion amount), but you can do that anyway; the 2008 opportunity never returns.

With your portfolio likely somewhat smaller than it might be, you can give away stocks and other assets at values unthinkable only last year, squeezing a lot more shares into the same $12,000 annual gift. So maybe you shouldn't stop giving just yet.

Tags: year-end tax planning.