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Recent Increases in Transfer Tax Exemption May Require Updating of Estate Plans
Estate Planning Bulletin


2006 brings several significant increases in various federal transfer tax exemptions and exclusions which should prove to be beneficial to clients who wish to minimize the potential transfer tax liability imposed on their beneficiaries. The amount of property which an individual can pass free of federal estate tax was increased by $500,000 to $2 million on January 1, 2006. (The amount exempted in 2005 was $1.5 million per individual.) For a married couple, this $500,000 increase can be “doubled” through the use of trusts, so that a married couple, with proper planning, can now protect up to $4 million from federal estate tax instead of the $3 million that was only available to married couples prior to 2006. Under current law, the federal estate tax exemption equivalent amount is scheduled to go to $3.5 million per person in 2009.

In addition, the federal generation skipping transfer (“GST”) tax exemption, which is the amount of property a decedent can leave free of an additional federal transfer tax imposed on bequests to grandchildren or more remote descendants, was also increased from $1.5 million to $2 million per decedent on January 1, 2006. The GST tax exemption is also scheduled to rise to $3.5 million per decedent in 2009.

Finally, the federal annual gift tax exclusion, which is the amount of property an individual can give to a family member or other beneficiary free of federal gift tax, was increased by another $1,000 for inflation to $12,000, as of January 1, 2006. (As clients may recall, for many years the annual gift tax exclusion was only $10,000 per donee until it was increased by $1,000 in 2002 to $11,000 for inflation. The 2006 increase to $12,000 represents an additional inflation adjustment.)

These transfer tax exemption/exclusion increases will enable clients to pass more property to their beneficiaries, and may also require clients to initiate a review of their existing estate plans to ensure that their estate plans remain in conformity and continue to accomplish the client’s goals and desires for his or her family. For example, for those couples whose combined assets are under $2 million, the use of “Credit Shelter” Trusts may no longer be necessary, and clients with these trusts in their current estate plans may want to remove these trusts. For those clients whose assets are somewhat in excess of $2 million, they may wish to modify their estate plan to a “disclaimer trust” plan to allow the surviving spouse the flexibility to decide after the first spouse’s death whether or not to establish a Credit Shelter Trust, and if so, how much should be placed in the Credit Shelter Trust in order to ensure that the surviving spouse’s own estate remains under the $2 million exemption amount. Finally, couples with larger estates may need to further adjust how they have assets titled in each spouse’s name for estate tax planning purposes in order to ensure that each spouse has at least $2 million in his or her own name during lifetime so that the spouse’s Credit Shelter Trust can be fully funded at death. This may require additional asset transfers from the “more monied” spouse to the “less monied” spouse.

It is anticipated that Congress will make additional changes to the federal transfer tax laws over the next few years. In light of this, it is recommended that individuals whose estate plans have not been reviewed within the past several years have their current estate plans reviewed by their estate planning advisor at this time in order to address these significant transfer tax law changes.
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