January 2006
The purpose of this Client Advisory is to let you know of several changes in the federal estate and gift tax laws which became effective January 1, 2006.
Gift Tax Annual Exclusion
The annual gift exclusion amount has increased from $11,000 per donee (i.e., recipient) in 2005 to $12,000 per donee in 2006. Therefore, you may now give $12,000 to anyone ($24,000 if spouses elect to split gifts) in 2006 without the transfer being treated as a taxable gift. The provision allowing an unlimited tax exclusion for direct payment of another's tuition and medical care continues in force.
Estate Tax Exemption
The lifetime exemption from the federal estate tax (known as the "applicable exclusion amount") has increased from $1,500,000 in 2005 to $2,000,000 in 2006 and will continue at $2,000,000 until December 31, 2008.
Maximum Estate Tax Rate
The maximum estate tax rate has dropped from 47% in 2005 to 46% in 2006.
Exemption from the Generation-Skipping Transfer Tax
The generation-skipping transfer tax ("GST") is designed to levy a tax on the transfer of wealth at each generation-level. As in the case of the applicable exclusion amount (i.e., the estate tax exemption), the GST exemption has increased from $1,500,000 in 2005 to $2,000,000 in 2006.
You should note that although the applicable exclusion amount is now $2,000,000, the lifetime exemption for gift tax purposes remains at $1,000,000.
The changes described in this advisory require that you consider the following:
- The exemption for New York State estate tax purposes does not conform to the federal applicable exclusion amount. The New York State exemption is $1,000,000 while, as noted above, the federal exclusion is now $2,000,000. Your Will may contain a formula clause which was designed to make maximum use of the federal applicable exclusion amount. Such Wills assumed substantial conformity between the federal and state exclusions. In 2006, however, with the gap between the federal and state exclusions having increased to $1,000,000, the cost of using the full federal exclusion in New York could be as high as $99,600.
- Another result of the use of formula clauses tied to the federal exclusion may be the transfer upon death to a spouse in trust (rather than outright) and/or to children of a greater amount than anticipated when the Will was drawn. For example, a person who signed a Will in 2001 with a formula clause tied to the federal exclusion may have anticipated that only $675,000 would pass to the spouse in trust and/or to the children. However, if that Will becomes operative in 2006, approximately $2,000,000 (and not just $675,000) would be transferred pursuant to that clause.
This may be an appropriate time to review your Will and estate planning, particularly from the standpoint of the change in the federal estate tax exclusion and the widening of the gap of such exclusion from the New York State exemption.
If you have any questions regarding this Client Advisory or wish to discuss any of the matters covered, please be in touch with Martin Zelner at 212.953.6633 or at zelner@cpsslaw.com.
The purpose of this Client Advisory is to inform clients and other interested parties of changes in the tax laws which may affect their personal planning. This Client Advisory does not constitute legal advice or an opinion. This document was neither written nor intended by Martin Zelner, Martin Zelner, P.C., or Cox Padmore Skolnik & Shakarchy LLP to be used, and cannot be used, by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.
