Worldwide: End of Year Estate Planning and Charitable Giving Update

As we approach the end of 2005 and the beginning of the new year, we want to call your attention to several recent changes in federal tax laws that may be of interest in your year-end charitable giving and overall estate planning. This update briefly discusses these latest developments.

On January 1, 2006, various exclusions and exemptions from the federal estate, gift, and generation-skipping transfer taxes will go into effect. The following chart depicts both the 2005 and 2006 amounts.

As we go to press, it is a foregone conclusion that there will be no new tax legislation in 2005 that will affect estate, gift, or generation-skipping transfer taxes, and the outlook for 2006 is uncertain. We maintain the view that a complete repeal of the estate tax is highly unlikely. Nevertheless, we expect that ultimately the estate tax exemption will be set permanently at an amount greater than $2,000,000, and we are hopeful (but less confident) that the lifetime gift tax exemption will be increased to equal the estate tax exemption.

The increased exemptions and exclusions will present planning choices and opportunities for many clients. As we have recommended in the past, each client's estate plan should be reviewed to determine whether or not adjustments should be made to take maximum advantage of the increased exemptions and exclusions. This may be particularly true for married couples, many of whom will be able to ease the ultimate tax burden on their children, grandchildren and other beneficiaries through proper planning.

Under the Hurricane Katrina relief bill, the contribution limit for gifts of cash to any public charity during the period from August 28, 2005, until December 31, 2005, has increased from 50 percent of adjusted gross income to 100 percent of adjusted gross income. These same outright gifts of cash also are exempt from the three-percent reduction in itemized deductions for individuals with an adjusted gross income over $145,950. These changes may present some donors with an attractive opportunity to fund outright gifts with assets withdrawn from an IRA or other qualified retirement plan, since the income inclusion from the qualified plan distribution will be fully offset by the charitable deduction. Before taking such action, however, donors should consider how increasing their adjusted gross income may reduce the amount they can deduct for medical expenses and casualty losses, accelerate the phase-out of personal exemptions, and cause some loss of other itemized deductions. Finally, we note that these temporary rules do not apply to cash gifts to donor-assisted funds.

*As before, the estate and gift tax exemptions work in tandem, with any gift tax exemption used during lifetime reducing, dollar for dollar, the amount of estate tax exemption available at death.

If you would like more information about this Alert or if you have any questions, please contact Frank G. Cooper of our Estates and Asset Planning Practice Group.

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