Federal Estate Tax Law Changes To Take Effect In 2006

Title:
Federal Estate Tax Law Changes To Take Effect In 2006
Publication:
From the December 2005 Riker Danzig <I>Tax and Trusts & Estates Update</i>
Practice:

The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), which was signed into law in June of 2001, made several changes to the federal tax law which were scheduled to take effect gradually. With the new year approaching, we would like to remind our clients and friends about tax law changes that will take effect on January 1, 2006.

1. Increase in Estate Tax Exemption. EGTRRA provided for gradual increases in the amount that an individual can pass tax-free at death (referred to as the "exemption equivalent"). Effective January 1, 2006, the estate tax exemption equivalent will increase to $2,000,000 (up from $1,500,000 in 2005). It will increase to $3,500,000 in 2009, with the estate tax being repealed in 2010 for that year only and reinstated in 2011 at a $1,000,000 exemption. Note that the gift tax exemption will not increase in 2006 or later years, but will remain at $1,000,000. As a result of the increase in the estate tax exemption equivalent taking effect in January, clients with wills that provide for the establishment of a bypass trust on the death of the first spouse or any other bequest of the estate tax exemption equivalent should review the titling of their assets, the value of their estate and how the increase affects their overall plan. For example, consider the following:

 

2. Increase in Generation-Skipping Transfer ("GST") Tax Exemption. The GST tax is generally imposed where property is passed to grandchildren or more remote descendants. Effective January 1, 2006, the exemption from GST tax will increase to $2,000,000 (up from $1,500,000 in 2005). The GST exemption will increase to $3,500,000 in 2009; the GST tax will be repealed in 2010 for that year only and reinstated in 2011 at an exemption of $1,000,000 plus inflationary adjustments. As a result of the upcoming increase, clients should note the following:

 

3. Decrease in Maximum Estate and Gift Tax Rate. Effective January 1, 2006, the maximum estate and gift tax rate will be 46% (down from 47% in 2005).