Ben Franklin may have been right about most things. But ironically, death taxes-those steep federal levies that erode your wealth as it passes from one generation to the next-can be avoided or at least substantially reduced, if you know how to work the rules. And don't assume you'll never be rich enough to have a taxable estate. Even though the last tax law change will soon let you leave your heirs as much as $1 million worth of assets without triggering estate taxes, you still may not have all the tax protection you need. In fact, when you add up such assets as your 401(k) and other retirement accounts, your home and the death-benefit payout of your life insurance, your estate is probably worth more than you think.

That realization certainly prompted the development of several estate protection tools:

• A credit-shelter trust can help shield from tax up to $2 million.
• A generation skipping trust to preserve assets for their grandchildren.
• A family limited partnership is more complicated but can shelter larger amounts.

If you still don't believe estate taxes can take a huge bite out of your assets, consider this: Once your estate tops the maximum exempt amount-$625,000 in 1998, rising gradually to $1 million in 2006-the tax rate starts at 37% and increases to 55% on estates over $3 million. At these rates, it's very possible that much of the wealth you've accumulated over your entire life won't make it to your kids.

To develop an effective tax-slashing estate plan, you'll need the guidance of a trusted estate-planning attorney; otherwise, you risk dying with a plan that only combative heirs and grasping tax collectors will appreciate. You and your spouse should expect to pay about $150 to $500 for a pair of wills, the cornerstone of most any estate plan, and $1,000 to $5,000 for the legal work required to use common tax-skirting techniques.

You'll improve your chances of developing a solid plan if you have a good grasp of your options. So, here's what you need to know leave more to your family and less to the tax reaper.

Credit-Shelter Trust

With the hike in the estate-tax exemption, this type of trust (also called a bypass or family trust) has taken on added luster. That's because a credit-shelter trust ensures that a husband and wife can ultimately double the amount of tax-free assets they leave their kids-up to $2 million in 2006 and beyond.

To understand how such a trust works, consider the fairly typical situation of Doug and Maureen Wulf, both 35, of Denver. For the first few years after they were married in 1990, the couple spent much of their income on travel-logging visits to 26 countries on six continents-and the rest paying down student loans and credit-card debt. Since then, however, they have acquired two priceless assets, Conor, 2, and Kathleen, four months. Mainly because of Doug's success as a real estate broker earning roughly $200,000 a year, the couple have also amassed an estate worth nearly $2 million, including their $500,000 four bedroom home, a $560,000 investment portfolio and $450,000 in term life insurance policies-$300,000 for Doug and $150,000 for Maureen. "Our attitudes and priorities have changed a lot since Conor and Kathleen were born," says Doug.

With both a family and their wealth to protect, the Wulfs' estate-planning goals are twofold: First, to ensure that the surviving spouse will be financially secure after the other dies, and second, to preserve as much of the family wealth as possible for their children.

Clearly the Wulfs could take care of each other by simply writing wills in which Doug leaves everything to Maureen and vice versa. Such a transfer would automatically be tax-free, since a provision in the tax law known as the marital deduction lets you bequeath any amount to your spouse without owing tax (as long as your spouse is a U.S. citizen). But passing everything to the spouse merely postpones the tax hit until he or she dies, undercutting the Wulf's second objective of shielding the family fortune from tax.

To solve the dilemma, Doug and Maureen each wrote a will bequeathing to a credit-shelter trust property valued up to the maximum estate exemption at the time of death. Each stipulated that the trust income go to the surviving spouse and that the principal pass to their kids after the survivor dies.

Assume, for example, that Doug dies first, sometime well into the 21st century. Under the terms of his will, assets worth $1 million will flow into his credit-shelter trust estate-tax-free, thanks to the $1 million exemption. The remainder of his estate will pass directly to Maureen, escaping estate tax because of the marital deduction.

When Maureen dies, the contents of Doug's trust will be distributed to their children. No estate tax will be due on those distributions-no matter how much the trust has grown since Doug's death-because the original contribution was covered by the $1 million exemption. In addition, Maureen's estate will qualify for its own $1 million exemption, enabling her to bequeath her own assets up to that amount, estate-tax-free.

One caveat: A credit-shelter can be funded only with separately owned assets. So if you and your spouse own most of your assets jointly, you'll need to retitle some of them in one name to ensure that they can pass into the trust as planned. Cautions T. J. Agresti, the estate-planning attorney in Denver who helped the Wulfs: "Failure to look closely enough at how the assets are owned is probably the most common mistake in estate planning."

Generation-Skipping Trust

As your circumstances evolve, so must your estate plan. Like the Wulfs, Ron Eastman, 62, and his wife Joanne, 61, of Naples, Fla. have wills that include credit-shelter trusts, which they drew up in 1986. After the Eastmans die, the trust assets will go to their two children, Randall ,38, and Julie, 36. In the years since the Eastmans established that basic estate plan, however, both their family and their fortune have grown. Their clan now includes a daughter-in-law, Esperanza, and their three grandchildren, Zachery, 15; Trevor, 13; and Cody James ("C.J."), 2. Meanwhile, Ron and Joanne's estate has exploded to $7.2 million, made up mainly of their 51% share of a sporting-goods dealership they own with their children, their $950,000 primary residence, a $300,000 lakeside vacation home in Minnesota and their stock portfolio.

Obviously, the Eastmans' estate has outgrown their original plan. Since Randall and Julie are already financially secure, the Eastmans have set their sights on sharing their wealth with their grandchildren.

To do so in a tax-savvy way, they've earmarked nearly $2 million for a so-called generation-skipping trust. In such a setup, the trust beneficiaries-generally your grandchildren-must be at least two generations your junior. You can, however, stipulate in the trust document that your own children may receive the trust income and even tap its principal to pay for virtually anything that can be said to benefit the grandchildren, such as housing, health care for the entire family, and college education. As Robert Buckel, the Naples estate-planning attorney who drew up the Eastmans' plan, explains: "The trust lets you funnel money to your child, but since you don't actually give the property to him or her, the sum is never included in your child's estate."

In the Eastmans' case, for example, grandchildren Zachery, Trevor, and C.J. are the beneficiaries of the generation-skipping trust. But their father, Randall, is entitled to the trust income-and has control over its principal. When Randall dies, the assets remaining in the trust will go to their kids without ever being diminished by taxes in his estate.

Says family patriarch Ron Eastman: "There will be some estate tax on the wealth that I've accumulated during my life; that's inevitable. But I see no reason for estate tax to be paid again when my son dies. Besides," he adds, "it's important to me to leave something for my grandkids."

One drawback: You'll create an estate-tax quagmire if you leave your grandchildren more than $1 million (or $2 million if you give jointly with your spouse). Above those amounts, bequests to grandkids are subject to yet another levy, the stiff 55% generation-skipping transfer tax, which is separate from estate tax. The tax is intended to prevent well-heeled grandparents from passing all their wealth to their grandkids in the hope of sidestepping a hefty tax hit in their children's generation. There is an exception: The generation-skipping transfer tax doesn't apply if you leave assets to the children of a deceased son or daughter.

Family Limited Partnership

As with the Eastmans, a family business is the largest asset in the estate of Sonny Rianda, 65, and his wife Lillian, 66. The Rianda's own a $6 million, 600 acre vegetable farm in Gonzalez, Calif., part of which Sonny inherited from his father in the late 60's. In keeping with family tradition, his son Michael, 37, wants to continue running the farm after his parents die. But the Riandas also want to give their other three children-Marilyn, 36; Jeff, 33; and Jean, 28-an ownership stake in the farm. Accordingly, the couple's biggest estate-planning challenge was to ensure that the children won't have to sell so much of the land to pay estate tax that there won't be a farm left to run.

Unfortunately, the last tax law changes provided scant relief for family business owners like the Riandas. True, starting this year, a small business owner can claim an estate-tax exemption of $1.3 million, compared with the $1 million exemption that goes into effect for everyone else in 2006. But many family businesses exceed that limit. Besides, the law places so many restrictions on qualifying for the bolstered exemption that "the change is more smoke and mirrors than substantive help," says estate-planning attorney Martin Shenkman in New York City, the author of Estate Planning After the 1997 Tax Act.

So the Riandas are sticking with the classic, albeit complicated, strategy known as a family limited partnership. In effect, the Riandas are giving away the farm while they're alive, rather than bequeathing it in their wills or transferring it through a trust. The partnership arrangement lets the couple control the farm as general partners while gradually bestowing interests in the business on their children as limited partners. Since the kids don't control the business, however, the value of their interests is heavily discounted from the fair market value of the farm itself. In the Riandas case, the discount came to 30%. (The IRS is on the lookout for excessive discounts, so if you consider setting up a family limited partnership, you're well-advised to hire an appraiser who specializes in such arrangements to compute the markdown.) So far, Sonny and Lillian have given their children interests with a fair market value of nearly $3 million-or just under 50% of the farm. But the couple haven't incurred any tax. Here's why: The first transfer, which they made in 1991, had a fair market value of $1.7 million. That discounted amount was equal to the estate-tax exemption back then for the two of them. Each subsequent transfer has had a discounted value of no more than $20,000 per child each year.

In general, you owe tax on substantial gifts you make during your lifetime, just as your estate owes tax on a sizable bequest. But if the amount you give is equal to or less than the estate-tax exemption, no gift-tax payment is due. Rather, the total of your taxable gifts is subtracted from the maximum exemption allowed at death. Moreover, the tax law lets you make annual tax-free gifts of up tp $10,000 a year to each of as many people as you wish, $20,000 if you make the gift jointly with your spouse. "Now that I know the farm will stay in the family," says Sonny Rianda, "I feel like I'm ahead of the game."