Estate Planning
With Congress seemingly putting estate tax reform on indefinite hold, the safest course for clients may be to plan for the worst and hope for the best; i.e. assume that the estate tax will not be abandoned and plan accordingly, and furthermore, know that all of the states will continue to feel budget pressure to continue or even institute death taxes at the state level.
On January 1, 2006, the exemption equivalent for estate tax purposes will increase from $1,500,000 to $2,000,000 per person. The amount allowable for annual exclusion gifts will increase from $11,000 to $12,000 per donee. For example, for 2006, this means that a married couple with two children and three grandchildren could gift $60,000 each ($120,000 total) gift tax free for the year. Of course, annual exclusion gifts may be made directly to an irrevocable life insurance trust (ILIT) to pay premiums on life insurance owned by the ILIT. Note that the lifetime unified credit exemption equivalent for gift tax remains at $1,000,000.
Also, don’t forget that transfers made directly to medical providers or educational institutions may be gift tax free and may not count against the $12,000 annual exclusion.
Retirement Planning
Many qualified plan limits will increase in 2006. Below are the 2006 limits:
IRC Section 412 limit for defined benefit plans. The maximum yearly benefit allowed is the lesser of 100% of compensation or: $175,000.
IRC Section 415 limit for defined contribution plans (maximum deduction) is 100% of compensation or: $44,000
Maximum amount of compensation that can be taken into account when determining an individual contribution to or benefit from a qualified plan: $220,000
Highly compensated employees are those whose compensation is over: $100,000
The maximum salary reduction for elective deferrals for 401(k), 403(b) and SEP plans is now: $15,000
Maximum elective deferral for a SIMPLE plan (unchanged): $10,000
Maximum Section 457 plan salary reduction: $15,000
The 401(k) and 403(b) dollar limitation for catch-up contributions for those individuals age 50 or over is now: $5,000
Finally, the Social Security taxable wage base increases from $90,000 in 2005 to $94,200 in 2006.
