Estate, Gift and Generation Skipping Tax Rates and Exemptions

The “Applicable Exclusion Amount” (AEA) is the amount that an individual can transfer to other individuals during lifetime, and/or upon death without triggering a gift or estate tax. The tax is offset by a credit (the “Unified Credit”) that offsets the amount of the tax due. This amount has generally increased over time, but was not tied to inflation until 2012.

Prior to 2010, any portion of a decedent’s AEA that was unused by the decedent during life or at death was wasted. The American Taxpayer Relief Act of 2012 gives the executor of the estate of a married decedent the power to elect (i.e., claim) the unused portion of the decedent’s Exclusion (the “Deceased Spouse’s Unused Exclusion Amount” or “DSUEA”). The DSUEA must be claimed on a federal estate tax return. Claiming the DSUEA increases the surviving spouses’ AEA. Spouses with this increased exemption are said to have a “Basic Credit Amount”. The process of claiming the DSEUA is generally referred to as “Portability.”

Estate Taxes

The chart below shows the amount of the Applicable Exclusion Amount since 1997:

Gift Taxes

The Applicable Exclusion Amount applies to lifetime gifts as well as to gifts at death. In addition, individuals may make gifts each year of up to the annual exclusion amount per donee without using any of their lifetime exclusion. The following chart shows the amount of these exemptions since 1987.

Generation Skipping Transfer Taxes

The federal generation skipping transfer (GST) tax is imposed on gifts to individuals who are two or more generations below the generation of the donor (e.g., grandchildren, great-grandchildren). The donee is called a “skip person” because the gift skips over the generation in between. The GST tax is imposed in addition to the federal gift tax, resulting in a compounded tax rate on such gifts. Individuals are permitted an exclusion which is based on the Applicable Exclusion Amount for the estate and gift taxes. Before 1996, the GST exemption had to allocated to a gift to exempt it from the tax. In 1996 the allocation became automatic for direct skips, and since December 31, 2000 has been automatically applied to some indirect skips unless the donor files a United States Gift (and Generation-Skipping Transfer) Tax Return (IRS Form 709) electing out of the automatic allocation. The chart below shows the exemptions since 1987: