DISINHERITING UNCLE SAM
Now it's time to see if Uncle Sam expects to be one of your heirs and, if so, what you can do about it. The good news here is that the federal estate tax affects only about 1% of the Americans who die each year. But when it hits, it packs quite a wallop: The tax rates start at 37% and rise to 55%.

What protects most of us is the unified credit that wipes out the tax on the first $600,000 worth of otherwise taxable transfers you make through gifts during your lifetime or through your estate after your death. It's called the unified credit because it offsets both the gift tax and the estate tax.

To see the effect of the estate tax, you need to estimate the size of your taxable estate. If you've completed a worksheet you've already laid the groundwork for saving on taxes.

Set up another worksheet and list for yourself and for your spouse:

* The total value of property that you own individually.

* 50% of the value of property that you own jointly with your spouse with the right of survivorship. (If your spouse isn't a U. S. citizen, add the total value, unless your spouse can prove the proportion that he or she contributed.)

* Your proportionate share of property owned jointly with right of survivorship with anyone other than your spouse, and your share of property owned as tenants in common.

* 50% of the value of all of your community property.

* Your interest in pension and profit-sharing plans.

* The value of any revocable trusts you created.

* The death benefits of insurance policies on your life payable to your estate (not to a named beneficiary) or of which you are the owner or for which you retain any "incidents of ownership," such as the ability to change beneficiaries, borrow against the policies or pledge the policies as collateral.

From the total, subtract your liabilities, including current bills, credit card balances, mortgages and other debts. For mortgages on property you own jointly with your spouse, count only half of the debt.

If you wind up with a net estate of less than $600,000, your estate won't owe the government a dime...if you die today. But the closer you and your spouse come to $600,000, the more likely tax planning will pay off as your assets keep growing.

REDUCING THE TAX
A well-crafted estate plan can make use of many methods to hold down the estate-tax bill. Among the strategies that you should discuss with your lawyer are:

* Using the unlimited marital deduction Any assets that go to your husband or wife - including those jointly owned - are not considered part of your taxable estate. No matter how big your estate, you are guaranteed to avoid the estate tax entirely if you leave it all to your spouse. That's not always a good idea, though, because it can result in more tax than necessary being due on the death of the surviving spouse.

Using the marital deduction to protect your assets from the tax means not using your credit to pass as much as $600,000 to someone else tax-free. Assuming your assets remain intact, when your spouse dies all or part of it could be taxed, including assets you could have passed on tax-free. (Note that you can't use the unlimited marital deduction if your spouse is not a U.S. citizen unless you create a special trust called a qualified domestic trust.)

* Using a credit-shelter trust A way around wasting the unified credit is to make sure each spouse owns sufficient assets in his or her name to use up the credit. That may mean that some joint-tenancy property may have to be retitled in the name of each spouse.

* Giving lifetime gifts If you are financially secure enough to part with assets permanently, what you give away while you're alive can't be taxed when you die, at least as long as you make tax-free gifts. There is an unlimited marital deduction for gifts make between spouses that can be used to make sure each spouse owns enough to use the unified credit.

You can also reduce your estate by making gifts that qualify for the $10,000 annual exclusion. That rule lets you give up to $10,000 each to any number of persons each year.

* Using an irrevocable life insurance trust Creating a trust to own insurance on your life is especially beneficial if you have a large estate because the proceeds of insurance policies in the trust will bypass probate and escape the federal estate tax.

* Making charitable gifts Your estate gets a deduction right off the top for property left to charity.