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Why Do Estate Exemptions Exist?

One of the major breakthroughs in the new tax law surrounds the estate and gift tax system. For the first time in over a decade, we have some clarity over what is going to happen with estate tax rates, exemptions and the “portability” of those exemptions, as we outlined here previously.

One of the hot topics of the fiscal cliff debate was the estate exemption level. This amount was scheduled to be reduced to $1 million in 2013, but the new law kept the existing exemption of $5 million on the books permanently moving forward. While these changes directly affect a very small part of the population, the impact will ultimately be far more widespread.

In this article, we will explore why exemptions exist in the first place, and our next post will discuss why the planning implications will filter down to a much larger number of taxpayers than it may appear on the surface. (more…)