Press Room: Tax Release

February 25, 2013

Inflation Indexing Creates Wealth Transfer Opportunities

Thanks to inflation indexing, each taxpayer has additional lifetime gift and generation skipping tax exemptions of $130,000 ($260,000 for a married couple) which offer significant new wealth transfer opportunities for 2013. In addition, the annual exclusion amount has increased from $13,000 to $14,000. Taking advantage of these new opportunities sooner, rather than later, offers the greatest potential for tax-free wealth transfer and avoids the risks of new “loophole-closing” legislation from a tax-aggressive government.

Last year, many people made substantial gifts to use all (or a portion) of their $5,120,000 gift and generation skipping exemptions in anticipation of legislation that could have dramatically reduced those exemptions. The good news is that the ultimate legislation made those exemptions permanent and indexed them for inflation. The result is an increase to $5,250,000 for each exemption in 2013.

While the increase of $130,000 seems modest by comparison to the total exemption, it can still be very beneficial.  As recently as 2010, the gift exemption was a “mere” $1,000,000. Experienced estate planners were able to transfer substantial wealth within that much smaller constraint. Using strategies like intra-family sales and valuation discounts creates leverage that can significantly increase the amount of wealth potentially transferred through seemingly modest exemption amounts.

Using your available exemptions sooner, rather than later, is beneficial for two primary reasons:

  • Post-gift income from and appreciation in value of the transferred property is excluded from your taxable estate.
  • As Congress continues to address the fiscal cliff and searches for ways to raise government revenues, there is a risk that it may enact measures that make wealth transfer more difficult and more expensive. Bills have been proposed to eliminate valuation discounts and certain types of trusts that are particularly effective at wealth transfer. Gifts and other wealth-transfer transactions completed before the effective date of any such legislation presumably would be grandfathered.