Current exemption from ordinary federal estate tax is $1.5 million per person, making a total of $3 million exemption for married couples who carefully plan ahead.  Family-owned businesses and farms that qualify can get an additional exemption.

1. If you are married, use both estate tax exemptions.

2. Remove assets from your estate before you die.

3. Buy life insurance to pay remaining estate taxes.

Let's say, for example, that Bob and Sue together have a net estate of $2.5 million and they both die in 2004. Bob dies first. He leaves everything to Sue, so no estate taxes are due then since there is a special estate tax exemption for the surviving spouse. When Sue dies, her estate of $2.5 million uses her $1.5 million exemption. The tax bill on the remaining $1,000,000?   About $500,000!

But if, instead, Bob and Sue plan ahead, they can use both their exemptions and pay no estate taxes. A tax-planning provision in their living trust splits their $2.5 million estate into two trusts of $1.25 million each. When Bob dies, his trust uses his $1.5 million exemption. When Sue dies, her trust uses what is needed of her $1.5 million exemption. This reduces their taxable estate to $0, so the full $2.5 million can go to their loved ones.

If you are married and qualify for the family business exemption, this arrangement may let you and your spouse leave your family much more...   tax-free.

This planning can also be done in a will, but you would not avoid probate or enjoy the other benefits of a living trust.

Also, you probably know who you want to receive your assets after you die. If you can afford it, why not give them some assets now and save estate taxes? It can be very satisfying to see the results of your gifts - something you can't do if you keep everything until you die. Appreciating assets are usually best to give, because the asset and future appreciation will be out of your estate.

Assets you give away keep your cost basis (what you paid), so the recipients may have to pay capital gains tax when they sell.

But the top capital gains rate is only 20% (assets held at least 18 months). That's a lot less than estate taxes (37-55%) if you keep the assets until you die.

Some of the most commonly-used strategies to remove assets from estates are explained below. Note that these are all irrevocable, so you can't change your mind later.

You can give more, but it will use up some of your estate tax exemption. That's because it's a combined gift and estate tax exemption. While you're living, its a gift tax exemption; after you die, its an estate tax exemption.

Charitable gifts are unlimited. So are gifts for tuition and medical expenses if you give directly to the institution.

You transfer your home to a trust for a period of time, usually 10-15 years. During this time, you continue to live in your home. When the time is up, it transfers to the trust beneficiaries, usually your children. If you wish to stay there longer, you may make arrangements to pay rent. If you die before the trust ends, your home will be included in your estate, just as it would without a QPRT.

There's more. A QPRT "leverages" your estate tax exemption.

Since your children will not receive the house until the trust ends, its value as a gift is reduced. For example, if the current value of your home is $250,000 and you put it in a QPRT for 15 years, its value for tax purposes could be as little as $75,000. That leaves much more of your exemption for other assets.

When the trust ends, the assets will go to the beneficiaries (usually your children). Since they will not receive it until then, the value of the gift is reduced. If you die before the trust ends, the asset will be in your estate.

For example, you and your spouse can set up a FLP and transfer assets to it. In exchange, you receive partnership shares. You keep the general partner shares and give limited partner shares to your children, removing up to 99% of the value of the assets from your estate.

As general partner, you have full control. Limited partners (your children) have none. Their shares cannot be sold or transferred without your approval. And because there is no market for these shares, their value is highly discounted. So you transfer the assets to your children at a reduced value - with no loss of control. This is a highly technical and changing area of law and definitely requires the help of your attorney.

With a CRT, you transfer the asset to an irrevocable trust. This removes it from your estate. You also get an immediate charitable income tax deduction.

The trust then sells the asset at market value, paying no capital gains tax, and reinvests in income-producing assets. For the rest of your life, the trust pays you an income. Since the principal has not been reduced by capital gains tax, you can receive more income over your lifetime than if you had sold the asset yourself. After you die, the trust assets go to the charity you have chosen.

Also, the three-year rule mentioned above does not apply to new policies. Beware, owning the policy will increase your taxable estate and estate taxes. To keep the death benefits out of your estate, set up an ILIT and have it purchase the policy for you.