Cut your estate tax: while the tax is being phased out, here are 10 ways to reduce it now.

Why should one be concerned about federal estate taxes anymore? Won't they be history by the end of the decade?

Perhaps. The 2001 tax legislation calls for the federal estate tax to slowly be phased out, by lowering the tax rate and raising the amount that is exempt from taxation. Under the plan, by January 1, 2010, the estate tax will he gone entirely.

But there are two good reasons for continuing to seek ways to cut estate taxes. First, the tax will be with us for several more years. Butt even more important, the repeal of the tax lasts only a year, unless Congress acts to make it permanent. As the 2001 tax cut provisions were written, a "sunset" provision wipes out the changes as of January 1, 2011. At that point, the old estate tax law returns, with a maximum 55 percent tax rate and an exemption of just $1 million. Optimists are betting that politicians will eventually opt to make the law permanent, but many pragmatists are planning fin" the possibility that the demise of estate taxes will be only temporary.

We asked experts to provide tips on reducing exposure to estate taxes. Recommendations are not ranked in any order. It is also best to consult with a professional for more details and actual tax consequences.

1. Life-insurance trust. "This trust allows money, or an existing life insurance policy, that is a part of one's assets to fund a trust that can he excluded from one's assets upon death," explains Wayne Thomann, a partner at Kemper CPA Group in Vincennes. However, the donor has to live at least three years beyond the timing of funding if an existing life-insurance policy is used to fund the trust. "Significant dollars can be funded for premiums and moved outside one's estate," Thomman says.

2. Charitable annuity. This is a gift to a charity. "The charity, in turn, guarantees to provide an annuity for the life of a beneficiary, or a fixed term," Thomann says. The remainder of the unused asset becomes an asset of the charity. The benefits: income-tax deduction for a piece of the contribution, assets are removed from the estate, and cash flow.

3. Annual exclusion gifts. According to Lisa Stone, a partner at Ice Miller in Indianapolis, this exclusion "is an amount that you can transfer free of any gift or other transfer tax." During one's lifetime, $11,000 can be transferred to any number of individuals, year after year. "If you have lots of children and grandchildren, then you can give $11,000 per child and grandchild, year in and year out," Stone says. A married couple can transfer $22,000 annually to each individual.

4. Credit equivalent amount. "Currently, this is equivalent to $1 million per person or $2 million for a married couple, and is scheduled to increase to $1.5 million per person at the end of 2003," Stone says. That money can be transferred to anyone during lifetime or at death without incurring federal estate taxes. A married couple with an estate valued in excess of $2 million "would want to split their property between the two of them--in their names individually--so that upon the first death, the deceased spouse's property can be set aside in trust for the benefit of the surviving spouse, utilizing the deceased spouse's credit, without having that property be taxed as part of the surviving spouse's estate."

5. Qualified personal residence trust (QPRT). "This is a way to transfer either a residence or a vacation home to children," says Janice Schlemmer, the trust, estate and gift tax manager at Baden Gage & Schroeder LLC in Fort Wayne. However, the person has the right to use the property for a period of years before it actually belongs to the children. "The benefit is that it leverages the lifetime gift or estate-tax exemption," Schlemmer notes. The QPRT requires a trust agreement with provisions that are fairly standard. One of the children usually acts as trustee. "I most often recommend that a QPRT be used with a vacation home because it establishes the value of the home at the time of the gift," Schlemmer says. "At least around here, we consider lake property as appreciating rapidly."

6. Grantor retained annuity trust (GRAT). This is an irrevocable trust that is comparable to the qualified personal residence trust. "Essentially, a GRAT is a way to leverage the amount of gifts that you are transferring," says Jeanne Longsworth, a partner at Baker & Daniels in Fort Wayne. With the current economic climate and lower interest rates, "as long as you have assets that are appreciating, you can achieve significant leveraging." Assets often consist of closely held business interests (S or C corporation stock).

7. Charitable lead trust. This is a trust that divides its interest between a fixed-dollar amount that flows annually to charity for a term of years and a remainder interest that passes usually to children or other desired beneficiaries after the expiration of the term of years. "In the trust agreement, the donor designates which charities will receive the annual fixed dollar amount," says Kristin Fruehwald, a partner at Barnes & Thornburg in Indianapolis. Then, at the end of the trust term, whatever trust assets remain will pass on to the individual beneficiaries. "If the trust assets grow in excess of the amount passing annually to charity, the remainder beneficiaries will receive the trust assets at a greatly reduced transfer-tax cost," Fruehwald points out.

8. Payments of tuition or medical expenses. Transfers for these purposes are not considered gifts and, hence, do not use up either the donor's unified credit or annual exclusion gift amounts. However, "these transfers must be made by the donor directly to the provider," Fruehwald says. For example, a grandparent could pay for a grandchild's college tuition, as long as it is paid directly to the college. "This does not count as a gift from the grandparent to the grandchild at all," Fruehwald says. Tuition is not limited to college. Private grade schools and private high schools are also covered.

Likewise, medical expenses include medical insurance. "For parents who have Generation Xers with jobs but no health benefits, this is a way to provide medical insurance for that child, by purchasing the medical insurance directly from the provider, and not have it count as a gift at all," Fruehwald says.

9. Family limited partnership (FLIP). "This partnership typically works best with a family business or with some asset that belongs to a well-to-do family that is attempting to reduce its estate tax exposure," explains David Forbes, manager of the Personal Trust Division at Merchants Trust Co. in Indianapolis. The FLP is divided between the current generation (which owns the asset) and the children or recipients, "You're discounting the value of the business," Forbes says. For instance, a $10 million business is parceled and passed on at a reduced value (a minority discount). This can result in a 25 to 50 percent discount when donating the assets over time.

10. Remainder purchase marital trust. This trust creates a life interest in a spouse with the remainder to the children. The strategy lessens the tax burden of the surviving spouse when he or she passes away. "The children actually pay for the remainder value, discounted by the life expectancy of the spouse," Forbes says. For example, a vacation property worth $1 million is discounted by the value of the surviving spouse's life interest. In essence, the children can purchase the vacation property for about $600,000. based on the surviving spouse living 10 years after the first death. A longer life expectancy will lower the purchase price. "The children are not only buying the properly at a discount, but locking in the current value against future appreciation," Forbes says.