There are three basic things to remember when getting started with estate planning:

The Estate-Tax Exemption
For 2004 and 2005 you can leave bequests (gifts to other individuals upon your death) worth up to $1.5 million free of any federal estate tax. This is the so-called estate-tax exemption. If you're married, both you and your spouse are entitled to separate $1.5 million exemptions. Better yet, the current $1.5 million figure is scheduled to increase in stages over the next few years: to $2 million in 2006; and $3.5 million in 2009. In 2010, the federal estate tax will supposedly be repealed altogether.

Until that day comes, a married couple with kids and a substantial net worth can optimize the estate-tax exemption with a bypass trust arrangement. When the first spouse dies, $1.5 million of estate-tax-free money goes into the bypass trust, which is set up for the benefit of the kids. The surviving spouse typically gets any remaining assets owned by the deceased spouse. This drill ensures that both spouses take full advantage of their respective $1.5 million estate tax exemptions, meaning a total of up to $3 million can be left to the couple?s heirs without Uncle Sam taking a bite (thus "bypassing" the IRS). See "You've Got to Start Somewhere" for the story on bypass trusts.

The Gift-Tax Exemption
You can also give away a cumulative total of up to $1 million to relatives, friends, whomever during your life without owing any federal gift tax. This is the so-called gift-tax exemption. If you're married, both you and your spouse are entitled to separate $1 million gift-tax exemptions. Unlike the estate-tax exemption, however, the gift-tax exemption won?t increase in coming years. Instead, it will remain fixed at the current $1 million level.

Gifts made under the so-called $11,000 tax-free-gift rule (more on that below) will not trigger any federal gift taxes, nor will they reduce your federal gift- or estate-tax exemptions. However, gifts in excess of the $11,000 "freebie" will reduce both exemptions dollar for dollar. Only if you're so generous during your lifetime that you completely burn through your $1 million gift-tax exemption will you have to start paying federal gift tax. Even then, the tax only hits gifts in excess of the $11,000 figure.

Bottom line: Relatively few people will ever reach the point of actually owing any federal gift tax.

The $11,000 Annual Gift Tax Exclusion
For those with really large estates, the $1.5 million estate-tax exemption isn't enough. That's where the $11,000 tax-free gift rule comes in.

The benefit of making tax-free gifts is twofold: It reduces your taxable estate, and it shifts the taxable income from the gifted money to your kids, who may be taxed at a lower rate than you. This $11,000-a-year strategy works particularly well for those who wait until late in life to start serious estate planning.

Let's say, for instance, you and your spouse have an estate worth about $5 million and you've built in almost no protection against the IRS. If you both die tomorrow, the federal estate tax could be as much as $1.64 million in 2005. Now, here's how a little financial maneuvering can pay off big. First, you have a lawyer outfit each of your wills with bypass-trust language. The bypass-trust arrangement shelters $3 million from federal estate taxes. Then, assuming you have two children (both married) and four grandchildren, and assuming you're able to give away $176,000 a year ($11,000 from each of you to both children, their spouses and four grandkids), you can cut that tax bill to almost zero in just a few years. (Gifts under the $11,000 rule don't cut into your gift- or estate-tax exemptions.) The increasing estate-tax exemptions over the next few years will speed the process of making your estate-tax bill vanish.