The best way to reduce estate taxes (or avoid them altogether) is to give away your assets while you’re alive. To get the most mileage from such gifts, you should know what and when to give. Here are the basic rules:

  • Upper limit — Everyone is allowed to leave $675,000 worth of assets to their heirs, tax-free in 2000. That number will increase to $700,000 in 2002, $850,000 in 2004, $950,000 in 2005 and $1 million in 2006.

  • No limit — In addition, you can make unlimited bequests to your spouse and to charity.

  • The tradeoff — The federal gift tax is “unified” with the federal estate tax. Thus, if you give away $100,000 to your son Tom, your estate tax break will be reduced to $575,000 in 2000, etc.

  • The exclusion — Gifts of up to $10,000 worth of assets per recipient per year ($20,000 for married couples) don’t count toward these limits.

  • “Ed-med” tax break — In addition to the $10,000 or $20,000 annual gift tax exclusion, you can pay someone else’s school tuition or medical bills with no tax consequences. Write checks directly to the school or health care provider.