To Our Valued Clients, Their Tax Advisors and Estate Planners,

Greetings from the Internal Revenue Service!

While you will not actually receive a notice like that from the IRS on January 1, 2011, effective on that date you will have a much closer relationship with the IRS than you do today.

As I pointed out in my August 23^rd e-mail (posted on our website: www.starmont.com),

“You are facing a large tax increase in 2011 unless Congress enacts legislation to prevent it.”

One of the taxes scheduled to go up on January 1^st is the estate tax. As I previously stated, “Estate taxes are re-imposed at 55% with a $1 million per person exemption compared to the 2009 rate of 45% with a $3.5 million per person exemption (there is no estate tax in the United States in 2010).”

For people with estates valued over $1 million or couples with estates valued over $2 million, one way to deal with this is to begin an annual gifting program. The gifts would probably be made to the beneficiaries of the givers’ trusts and/or wills, so beneficiaries would receive the money now instead of when the givers passed away.

As long as the giver does not make an annual gift of more than $13,000, there is no gift tax owed, no matter how many $13,000 (or smaller) gifts are made. Thus a giver could give to, for example, children, spouses of children, grandchildren, etc. Gifts to minors could be placed in a trust or used to fund a 529 Plan for college education.

Recipients of the gifts pay no taxes of any kind upon receipt of gifts.

Givers can also make gifts directly to educational institutions and/or to providers of health care services on behalf of the recipients of those services without incurring any gift tax, no matter the size of the gifts.

The problem with a gifting program is the givers’ fear that their money will run out before their “plans end” (the Starmont planning software euphemism for death).

But the goal of the gifting is to reduce the size of the estate to the exemptive amount ($1 million for individuals, $2 million for couples) at the time the giver’s plan ends. Givers have to make informed decisions about how much to gift each year, given their liquidity needs, age and health situation. For Starmont Clients who are going to be givers and not receivers, Starmont can do a cash flow analysis that shows the effect on the overall portfolio of different levels of giving.