The American Taxpayer Relief Act of 2012 indexed the $5 million estate tax exemption to inflation and set a 40% tax rate. That means the size at which an estate becomes taxable will grow each year--likely by more than $100,000. Estates over $5.25 million are taxable in 2013.
Instead of leaving that extra $100,000 or so each year in an estate until the owner dies, advisers are urging some taxpayers to give that money away, either to a trust or as an outright gift. These gifts, whether securities, real estate, or shares in a business, ideally will rise in value over the years.
"You're moving more out of the estate--assuming the assets you transfer go up in value," said Don R. Weigandt, managing director for wealth advisory with J.P. Morgan Private Bank in Los Angeles.
In coming months, his group will start to talk to clients about the strategy, Mr. Weigandt said.
Other advisers, like Carol G. Kroch, managing director, wealth and philanthropic planning at Wilmington Trust in Delaware, have already started to strategize with clients. The power of the exemption, Ms. Kroch noted, is "pretty dramatic when you think about how over time it's likely to grow."
Houston advisor Henry Bragg said he plans to recommend gifts based on the indexed estate tax to a retired chief executive of a public company and the man's mother.
The family has "multi-generational wealth issues," said Mr. Bragg, director of financial planning for Horizon Advisors, with around $205 million under management. The man and his wife, who have $30 million, stand to inherit more than $10 million from the mother, whose net worth is around $100 million. The family has about 19 trusts and several family partnerships.
"His mother is ready to gift the additional amount...he is not," Mr. Bragg said of client, who's not convinced he can afford to give away his money.
For many wealthy people, making these gifts each time the estate-tax threshold rises could be relatively painless. They can leverage steps they took at the end of 2012, as Congress weighed whether to cut back how much an individual can give away tax-free in a lifetime. Many set up trusts to hold gifts, and could simply "top off the trusts" with gifts as the tax is indexed, according to Mr. Weigandt and Ms. Kroch.
Indeed, those who make gifts to trusts that already exist face no legal fees and can keep the process simple. Some may just ask an adviser to wire money from one account into another. They must file a federal gift-tax return, however.
The gifts taxpayers make to take advantage of the indexed estate tax are separate from the annual exclusion gifts they can make each year. For 2013, a taxpayer can give unlimited gifts of up to $14,000 per recipient.
An important part of the strategy is to pick the right asset to give.
A good choice are those that are easy to transfer and value. For example, it's easy to give $100,000 shares of publicly traded stock, Ms. Kroch said. In contrast, it would be expensive to value a closely held business each year to give away its shares.
Also, clients should choose assets likely to rise in value, and that already have a fairly high tax cost basis. Heirs then don't have to pay as much capital-gains tax when they ultimately sell the gift. That can be a tough combination to find, as often the assets most likely to appreciate have a low cost basis as well.
"If you can only have one or the other, potential appreciation will save more future estate tax," Ms. Kroch said.
How much is the estate tax threshold likely to rise each year? An estimate is available.
Each year, the IRS announces adjustments to tax brackets, exemptions and other items, after it gets official government statistics on inflation. The Tax Policy Center uses projected inflation to estimate its impact on the estate tax.
"Since the exemption increases with inflation, it is projected to rise by a little over $100,00 a year for the next decade," said Ben Harris, senior research associate at Urban-Brookings Tax Policy Center.
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