One of the things you should be aware of when planning how to transfer your assets to your heirs is possible exposure to the federal estate tax. Whether or not you are going to be subject to the tax depends upon the overall value of your estate compared to the estate tax exclusion at the time of your death. Determining this is more difficult than it sounds because the estate tax exclusion moves around so much.

Currently, the estate tax exclusion is $5 million so the portion of your estate that exceeds this amount is taxable, and right now the rate of this tax is 35% . . . at least until the end of next year. Unless Congress acts before then, the estate tax exclusion will go down to just $1 million at the beginning of 2013 and the rate of the tax will be raised to 55%. So if your estate is worth more than $1 million and you expect to live beyond the end of next year you may want to continue reading.

One way to gain estate tax efficiency over two generations is to make generation skipping transfers (or GSTs) through a trust. Rather than naming your children as the trust beneficiaries, you skip a generation and name your grandchildren as the beneficiaries. Your children are not left out in the cold however; they can still benefit from the trust by receiving distributions from income earned by the trust and can also use property that is owned by the trust.

But since the children don’t own the assets, no estate tax is levied when they die. The grandchildren assume ownership of the assets in the trust upon the death of the children. They may have to contend with the generation-skipping transfer tax, but with careful palling, the resources can be available to two generations while being subject to just one round of taxation.