What is an important factor to consider when using a net gift technique?

In the context of using a net gift technique, it’s crucial to understand the implications of the gift tax on the donor. When the donor agrees to pay the gift tax associated with the transfer, this amount is considered a gift itself and may create taxable income for the donor. The donor effectively exchanges the gift tax liability for an increased basis in the gifted asset, which means they may have to report this on their income tax return.

This technique is often employed to reduce the size of the taxable estate, as the amount paid in gift taxes is also removed from the estate. However, the tax implications, especially regarding the creation of potential taxable income for the donor, are an important consideration that must be examined.

Other factors, such as the donee's income or the donor’s adjusted basis, do not specifically relate to the operational mechanics of using a net gift technique as directly as the potential tax income from the gift tax payment. Likewise, while staying below the estate tax threshold is important for general estate planning, it does not specifically relate to the mechanics of net gifting. Understanding these financial dynamics is essential for properly implementing the net gift strategy.