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Subject:  Re: Liquidating Gifted Mutual Fund Date:  9/18/2000  4:37 PM
Author:  donk23 Number:  40064 of 127753

Last month, my mother transferred/gifted an Oppenheimer mutual find valued at approx. 12K to me. (She first bought these funds about 5 years ago - last contribution being about 3 years ago) What I want to do is invest that money in a better performing Vanguard Index fund. I am under the impression that the most expedient way to do that would be to liquidate the gifted fund, then start up a new fund with that money.

What I want to know is:

-What's the deal with the whole "gift tax" and 10K limit? What will I have to pay come April 15 (whether I re-invest this money or not)?

First some basics. Anyone may give another person up to $10K each year with gift tax due. (You may give your spouse an unlimited amount; this is a special case.) If a person gives a married couple a gift, it can be treated as if given to two people; i.e. the limit is effectively $20K before gift tax is due. Similarly, if a gift is given by a married couple, it may be treated as if half had been given by each person. Again, this effectively doubles the annual limit.

Any gift in excess of $10K per person counts toward the donor's (the giver's) lifetime unified estate/gift tranfer exclusion. This year it's $675K but it will be going up to $1M in 2006. (Technically, the law specifies a unified tax credit but it works out to be equivalent to the $675K exemption.)

In the situation you've described above, if your mother is married or you are, she can avoid either paying a gift tax or taking a hit on her lifetime credit. You won't incur any tax just for having received the gift. With regard to the reinvesting question, see below.

-What kind of taxes will I have to pay if I liquidate this, and immediately re-invest?

If you sell all or any part of the shares in the mutual fund, you will be obliged to declare any gain on the tax return for the year in which you sold the shares. It doesn't matter what you do with the proceeds.

Your gain will be based on your mother's basis in the shares. Also, for the purposes of short-term vs. long-term gain/loss, your acquisition date will be the same as your mother's as well. You will need to get this information from her in order to correctly calculate your tax due. Based on your scenario, it would appear that most of the shares are eligible for long-term status. The reinvested dividends, capital gains within the year before sale would be handled as short term.

-Does it matter when I do this (having just received these mutual funds)?

The tax that you owe due to selling some or all of the shares will not change depending on when you do it (other than you might have a larger or smaller gain because the value of the shares changed). The tax will ultimately be due on the following April 15th. However, depending on your circumstances, you may need to make estimated tax payments in order to avoid underpayment penalties and interest. This article gives the lowdown on estimated taxes:

Good Luck.
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