Call me cold hearted, but I have little sympathy for rich families who tear at one another's throat after their ornate estate-planning schemes go awry. I've seen too many people end up in court or, worse, in front of the Internal Revenue Service, all because their plans were too convoluted for their own good.

Yet taxpayers never seem to learn. Well-off (and not so well-off) people still try to outmaneuver the estate tax laws with moves like selling their home to their children and then renting it back, or setting up wacky corporations and divvying up the shares among favored offspring.

A better approach is to use one or more common trust agreements to keep the IRS away from your estate. If it's done right, even truly wealthy people can avoid estate taxes all together. In fact, the three common trusts I've outlined can be set up by any estate lawyer without much cost or fuss.

First, though, some background on estate taxes. The basic law is this: You're never taxed on the money you leave to your spouse, no matter how much it is. But right now you can only leave a total of $625,000 to everyone else (your kids, grandkids, siblings, etc.) without a tax bill. Go above that figure and your heirs will have to pay estate taxes, which top out at a painful 55 percent. So, for a couple, the current limit is $1.25 million, a figure that will increase to $1.3 million next year and continue rising each year until it hits $2 million ($1 million each) in 2006.

Think you'll never be rich enough to worry about estate taxes? Think again. Your estate includes your house, proceeds from your life insurance and, usually, the value of you retirement plan.

The Wasted Exemption

If you and your spouse are worth say, $1 million (well under the $1.25 million limit) and you do no estate planning, here's what's likely to happen if you die tomorrow: You will leave your share to your spouse with no tax bill. But when your spouse dies, he or she will have only one $625,000 exemption to play with. That means $375,000 out of your original $1 million estate will be taxable to your heirs, leaving them with a whopping $143,750 estate tax bill. So by leaving all your money to your spouse, you've effectively given up your own personal $625,000 estate tax exemption.

That's where a bypass trust comes in. Instead of leaving everything you as a couple own to your spouse, you specify in your will that you want to leave $625,000 to the trust. The rest can be left tax-free to your spouse. She or he can tap into the trust for reasonable living expenses, and when your spouse dies, the money from the trust goes tax-free to whomever you specified as the ultimate beneficiaries. Your spouse decides who gets his or her share of your assets, and since they're well below the exemption limit, there won't be any estate taxes. By using this strategy, the couple in the earlier example save their heirs $143,750 in taxes in exchange for roughly $2,000 in legal fees. (It's such a good deal that your heirs should gleefully offer to pay the legal bill. Of course, they won't, but they should.)

You could get the same result by leaving your assets to your children instead to your spouse. But then your kids would control the money, and your spouse would be put into the uncomfortable position of having to ask them for cash. The bypass trust prevents such awkward positions.

QTIP TRUST

My theory about taxes is this: If you can't avoid them, delay as long as possible. That's one benefit of the Qualified Terminable Interest Property (QTIP) trust, which is also useful for couples with children from previous marriages.

A QTIP works like a bypass trust, with one big difference. For the purpose of taxes, the money goes into your spouse's estate, not yours. That's an important distinction because generally, when you name the ultimate beneficiaries of a trust, the money must go into your estate. A QTIP trust is the exception. The benefit here is that you can leave more than $625,000 to your kids, but they won't have to pay taxes on it until your spouse dies. There is one potential cost to this benefit (depending on your situation): Your spouse must get the income generated by the trust.

The QTIP trust is often paired up with a bypass trust-estate planners call it an A-B trust arrangement. This setup can be really helpful if this is your second marriage and your spouse is worth either far less or far more than you are.

Here's how the QTIP trust works. Say you're worth $1 million and your wife is worth $200,000. Your first step would be to set up a bypass trust for $625,000, with your kids as the ultimate beneficiaries, to maximize your own estate tax exemption. But what should you do with the remaining $375,000 in your estate? You could, of course, leave it to your spouse with no tax penalty, but that means she would determine the money's ultimate fate. Or you could give it directly to your kids, but then they would have an immediate tax bill.

The best choice is to set up a QTIP trust, naming your kids as the final beneficiaries. In this case, the money goes into your wife's estate, but when she dies, the cash goes where you want it to go. And since she's still under the $625,000 estate tax exemption, there's no tax bill.

The QTIP trust is now more attractive than ever because last year's tax bill began a series of long-overdue increases in the estate tax exemption, which had stood at $600,000 seemingly forever. Now it really can pay to defer your estate taxes as long as possible, because the exemption will hit $1 million in 2006. So even if a QTIP trust puts your spouse over the current estate tax limit, if he or she lives long enough, the limit will rise beyond the size of the estate. Voila! No tax bill.

However, before setting up a QTIP trust, keep in mind that your kids won't see the money until your spouse dies. "If you're a 65-year-old man who's run off with a 25-year-old woman, then a QTIP trust is probably not for you," says Steve Katten, a tax attorney in Fort Worth, Tex.

Hate Your Kids?

So far, we've assumed you want to leave your cash to your kids. But what if your kids are creeps and your grandkids are dolls? (After all, they say genetic traits sometimes skip a generation.) One problem is if your grandchildren are minors, then their parents would control the money, which would defeat your intended purpose.

One answer is a Crummey trust. The money can be used for college, and you build up the trust through annual gifts of up to $10,000 (rather than through your estate). The income is generally taxed at your grandchild's low rate, and you can defer trust distributions until he or she is responsible enough to actually attend the classes you're paying for.

There's one catch: Your grandchild must have the legal right to withdraw your annual trust contribution during a "window period" of, say, 30 days after each gift. Of course, you can make sure your grandchild realizes that if he or she does actually make a withdrawal, then your largesse will quickly come to an end.

One final note: Just setting up the trust is not enough to put your estate in order. You also have to change your will and possibly the title to your assets; otherwise, your machinations may save zero tax dollars. For example, if you and your spouse have a vacation home that is jointly owned with right of survivorship, when you die, that property goes directly to your spouse no matter what your will says.

Ditto with life insurance and IRA proceeds if your spouse is named as the beneficiary. In short, your will's provisions don't matter a whit for assets that go directly to your spouse by contract or by operation of law. And at that point, you won't be in a position to change things.