Your Will

It may surprise you to learn that, according to Consumer Reports, 70% of American adults don't have wills. Why? Blame inertia. "People know they're going to die eventually. But nobody plans to die in the next year." The trouble is, if you die suddenly without a will, you'll be sticking your family with a lot of unneeded confusion at what couldn't be a more difficult time.

A will can be quick and easy to produce -- all the more reason to do one now -- but it must do a few specific things. It must name an executor. It must name a guardian, if you have minor children. And to prevent the possibility of your estate being drained by legal bills, it absolutely must spell out how you want your property distributed as specifically as possible. The more vague the instructions, the more likely your descendants will have reason to quibble.

To avoid such strife, you can draw up a simple will -- spelling out exactly who gets what -- in a single afternoon, using Nolo Press's Willmaker software. Otherwise, you'll want to hire a lawyer, which will cost between $500 and $1,000.

A Living Trust

For some people, a living trust, sometimes called a will substitute, can be more effective than a will. One of its advantages is that your assets move to your heirs without having to go through probate -- the process by which the state examines your will and declares it valid. That's a big plus in states like California and Florida, where probate can drag on for months. And if you own property in several states, multiple probate proceedings may be in order. Moreover, a living trust is private, while probate is a public process -- a plus if you don't want people to know who got what.

But living trusts, which are often peddled as estate planning cure-alls, aren't for everyone. At $2,000 to $3,000 a pop, they're more expensive than wills. And to make them effective, all your assets -- your house, your brokerage accounts, everything -- must be transferred into the trust. In addition, unless teamed with tax-saving bypass and QTIP trusts, living trusts won't save a dime of estate taxes.

Durable Power of Attorney

In the summer of 1987, Marcia Kowan's mother had a stroke and needed to go into a nursing home. The mother had a will and kept it up to date, but she never signed what's known as a durable power of attorney. That meant Kowan couldn't get at her mother's substantial assets to cover the nursing home bills. She had to hire a lawyer and file to become her mother's guardian. The cost, $5,000, was a big chunk of Kowan's salary as a schoolteacher in White Plains, N.Y.

The oversight was small. A durable power of attorney -- which, unlike a regular power of attorney, has staying power in the event of a disability -- doesn't even require a lawyer. And you can get the forms you need at the local stationery store for a couple of dollars. But the impact was large. "It was mad hysteria," Kowan remembers.

A health care proxy can also eliminate much pain on the part of your heirs. If you should become terminally ill or injured in an accident, and you don't wish to be kept alive by artificial means, a health care proxy enables you to authorize named individuals to make medical decisions on your behalf. In other words, it instructs the hospital not to put you on life support if there isn't reasonable expectation of recovery. The proper forms for your state are available at local stationery stores.

Bypass Trusts

If you're married and have assets worth more than $650,000 in 1999, set these up for both you and your spouse. A bypass trust allows both you and your spouse to take advantage of the $650,000 unified credit -- the maximum the IRS allows to be passed on tax-free -- for a total of $1.3 million. (That figure will climb gradually to $2 million by 2006.)

Most couples fail to execute this fairly simple maneuver because they're lulled into a false sense of security by IRS regulations that allow you to give everything to your spouse tax-free. The beauty of the bypass trust is that although the money you leave behind is earmarked for your kids, your spouse can collect the income off the money and in some cases even tap into the principal. But since the money technically "bypasses" both of your estates, it never gets hit by estate taxes. You'll need a lawyer to execute this trust, but it's a fairly standard procedure, and you shouldn't have to pay more than $2,000 for the legal work required. Don't forget to take into account in your trust document that the unified credit is now rising annually.

QTIP Trusts

A QTIP works like a bypass trust, with one big difference. For the purposes 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 $650,000 to your kids, but they won't have to pay taxes on it until your spouse dies. This is an excellent technique when you have children from different marriages and you want to care for your spouse, but then pass the remainder to your own children. 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 also 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 $650,000, with your kids as the ultimate beneficiaries, to maximize your own estate tax exemption. But what should you do with the remaining $350,000 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 $650,000 estate tax exemption, there's no tax bill.

The QTIP trust is now more attractive than ever because the 1997 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.