Before 2011, tax law allowed you and your spouse each a $3.5 million exemption from federal estate taxes and a $1 million exemption from gift taxes. In December 2010, Congress passed legislation providing $5 million federal estate tax exemptions for both you and your spouse and increasing the gift tax exemption to $5 million each. This law is set to expire at the end of 2012.

While Congress may preserve the $5 million estate tax exemption, it is not a sure thing that it will extend the gift tax exemption at the $5 million level. This could make it more difficult for high net worth individuals to transfer assets from their estates after 2012.

ESTATE PLANNING DECISION MAKING

With the potential to shield a combined $10 million worth of assets from gift tax until the end of 2012, we counsel our couples clients to reevaluate their estate planning now to determine how best to take advantage of this opportunity.

The biggest opportunities lie where a client has an asset that presently has a low valuation but is highly likely to appreciate over the years. Equity ownership in a growing, privately held business, property whose value has not fully recovered since the 2008 crash, and quality art and antiques are but a few examples of assets whose values are likely to rise. These could be put into a trust to pass on to children or grandchildren, but remain for use by you or your spouse during your lifetimes. Assets such as these have the potential to grow significantly in value between the time they are put into a trust and when the use passes to your beneficiaries. As such, the actual dollar value that you may end up sheltering from estate tax can far exceed the $10 million current estimated value of the asset.

A SPECIAL KIND OF GRANTOR TRUST

You should explore whether an intentionally defective grantor trust (IDGT) could be of use for taking full advantage of combining the $5 million gift tax exemption with the $5 million estate tax exemption. This so-called dynasty trust is a type of irrevocable trust that is “intentionally defective” solely for income tax purposes: the income from the trust is taxed to the grantor, not to the trust. Because these trust assets grow without being eroded by income taxes, you can leave a greater amount of wealth for your beneficiaries.

There are complexities as to how an IDGT is funded and how the asset to be put in it is valued, so meet with your wealth advisor for counsel as to which of your assets make most sense to move into such a trust. Then, you and your spouse should sit down with your estate attorney to discuss the specifics of establishing your trust.

Lastly, keep an eye on the clock. You may only have until midnight on December 31, 2012, to get the most out of your gift tax exemption. There may be a mad rush at the end. Plan now.