By Joseph R. Coluzzi, CPA

Effective in 2006, the per person exemption from the federal estate tax has increased from $1.5 million to $2 million. Accordingly, a husband and wife together, with proper balancing of investments and structure to their Will or Revocable Trust, can shelter up to $4 million of net worth before incurring any federal estate tax.

For many couples, or for a single taxpayer with net worth under $2 million, the increased exemption will permit simplification of estate planning strategies. In some cases, a will or trust containing a “credit shelter” trust at the death of the first spouse may no longer be appropriate. Rather, a simplified document will suffice, passing all assets to a surviving spouse, but using backup disclaimer language in the event the estate exceeds the applicable exemption amount.

If the new exemption amount suggests that the estate tax may no longer be an issue, we can assist in reviewing whether changes to your documents may be appropriate. In other cases, however, where the estate tax is still a threat, the magnitude should be assessed and planning strategies considered. The estate tax applies at a flat 46% federal rate on net worth in excess of $2 million, meaning that this tax is still a significant cost for many.

For those who remain exposed to this tax and wish to make lifetime gifts, the annual gift exemption is increased from $11,000 in 2005 to $12,000 for gifts in 2006. Thus, any one individual may transfer property of up to $12,000 in value annually to any other individual without gift tax reporting.

Caution:  Gifts in excess of this annual gift exemption must be documented by filing a federal gift tax return. These gifts are a direct reduction in the donor’s eventual estate exemption. However, these lifetime gifts are limited to a cumulative exemption of $1 million. This limit remains frozen; it did not increase like the estate exemption. If a donor makes gifts exceeding $1 million, federal gift tax must be paid.