Your Estate & Gift Tax Exemption Is Worth More Than You Think– August 21, 2014

While the American Taxpayer Relief Act of 2012 extended tax cuts for some individuals and increased rates for others, one resulting benefit that most can agree on is the “permanency” it brought to the uncertain world of estate planning, at least for now.

The Act set the top marginal estate tax rate at 40%, which, even though it marked an increase in the rate, still served as a digestible compromise to the threat of a 55% rate had the Act not passed. The Act also set the estate and gift tax exemption at $5 million, with an option for portability from one spouse to another.

Setting a permanent $5 million exemption was a huge win for individuals with larger estates and significant estate planning needs. But what many people may not know is that their estate and gift tax exemption is actually worth more than $5 million. This is because the Act calls for the original $5 million amount to be indexed each year for inflation, thus creating increasing exemption amounts that can further help reduce an estate on a tax-favored basis.

The following chart shows the amount of the estate and gift tax exemption over a three-year period.

Year Lifetime Exemption
2012 5,120,000
2013 5,250,000
2014 5,340,000

Even if a couple gifted the maximum allowable ($10,240,000) under the gift tax rules in 2012, the indexed exemption creates an opportunity for additional tax-free gifts. For example, spouses who used their full joint exemptions in 2012 would have an additional $440,000 of lifetime exemption between the two of them to use to make additional transfers free of gift tax. By employing the use of wealth transfer techniques, such as Grantor Retained Annuity Trusts (GRATs) and sales to intentionally defective grantor trusts (IDGTs), individuals may be able to leverage this additional indexed exemption to transfer much larger amounts out of their estates with little or no gift tax.

Taxpayers should consider the additional indexed exemption when implementing their annual gifting strategy or as a supplement to a previous asset transfer. Provided inflation grows, the estate and gift tax lifetime exemption should continue to grow as well, offering taxpayers additional tax-free gifting opportunities each year.

Contact a member of your service team for further discussion.


This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.