If you’re concerned about the impact of transfer taxes on your gifts, consider making “net gifts” to your loved ones. A net gift is simply a gift for which the recipient agrees to pay the gift tax, thereby reducing the value of the gift for tax purposes. It may also be possible to reduce its value further through the “net, net gift” technique.

##### The technique in action

Rather than get caught up in an endless loop of calculating the tax, reducing the gift’s value, recalculating the tax, and so on, there’s a simple formula for determining your son’s tax liability: Gift tax = tentative tax/(1 + tax rate). In our example, the tentative tax is \$400,000 (the tax that would’ve been owed on an outright gift), so the gift tax on the net gift would be \$400,000/1.4 = \$285,714.

You can confirm that the math works out by assuming that you give your son \$1 million and that he agrees to pay \$285,714 in gift taxes. That tax liability reduces the gift to \$1 million – \$285,714 = \$714,287, resulting in a tax liability of .40 x \$714,287 = \$285,714.

By using a net gift technique, you reduce the effective tax rate on the \$1 million transfer from 40% to only 28.57%. Note that if the gift is in the form of appreciated assets rather than cash, the recipient’s payment of the tax liability can result in capital gains taxes for the donor.

##### Taking it up a notch

It may be possible to further reduce the effective gift tax rate by using a net, net gift. Under this technique, in addition to assuming liability for gift taxes, the recipient also agrees to pay any estate tax liability that might arise by virtue of the so-called “three-year rule.”

Under that rule, gifts made within three years of death are pulled back into the donor’s estate and subject to estate taxes. The U.S. Tax Court has effectively given its blessing to the net, net gift technique, allowing the value of a gift to be reduced by the actuarial value of the recipient’s contingent obligation to pay estate taxes that would be owed if the donor were to die within three years of making the gift.

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We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.