Thanks to changes to estate tax laws, the federal government is taking less of what’s left behind. Estates worth up to $1.5 million are exempt through 2005.

But take a close look at what you own. Many middle-class taxpayers are finding that when they combine their assets with a sizable pension account or insurance policy, estate planning is critical.

If your net worth is growing faster than the estate tax exemption, here are some strategies that could help you maximize what you leave to your heirs.

1. Give generously

You can always shrink your estate tax liability by shrinking your estate. One good way to do this is to maximize annual gifts to your heirs-to-be, says Natalie Choate, estate planner with the Boston-based law firm of Bingham McCutchen LLP and author of “Life and Death Planning for Retirement Benefits.” A single person can give up to $11,000 per year in cash or property without triggering any taxes; a couple can gift $22,000.

You’re also allowed to make a once-in-lifetime gift of $1 million, in addition to the $11,000 annually, says Bill Kirchick, an accredited estate planner and partner at Bingham McCutchen. “And you could do it all at once or over a lifetime,” he says.

2. Send the grandkids to college

Beyond whatever cash and property you give to relatives, the government allows you to pick up educational (and medical) expenses for family members without triggering any additional taxes.

Granted, not every family will want to share these costs. “It’s kind of messy and awkward,” says Choate. “But it does minimize estate taxes.”

And you must pay the bill yourself, not simply write the family member a check for the amount. “It’s got to be paid directly to the medical provider or educational institution,” says Stuart H. Sorkin, a tax attorney with Frank & Associates PC, a Bethesda, Md.-based law firm.

3. Divide and conquer marital asset estate limits

Husbands and wives are generally allowed to leave unlimited amounts of money and property to each other without triggering any estate taxes. In addition, each spouse can leave an estate of up to $1.5 million (in 2004 and 2005) without triggering estate taxes. So a couple that shares a $2.5 million estate is all set, right? Wrong.

The surviving spouse is allowed to take total control of the couple’s combined estate of $2.5 million without any tax consequences. But when he or she dies, that estate will be subject to estate taxes on the portion that exceeds the exemption amount at the time.

Sorkin recommends that both parties set up wills giving the survivor the option to put anything more than the estate-tax exemption into a unified credit trust. This trust gets its name from the tax provision that outlines the amount of money a person can give away, either before or after death, and not face any tax consequences. The trust shields a first-to-die spouse’s assets above the tax threshold after the death of the second spouse.

But to be eligible for a unified credit trust, assets must be held separately. This could be a problem if you and your husband maintain your assets in both names. Divide your assets equally and title them separately so you can establish the trust.

Holding assets separately, however, is not for everyone. “You only want to look at this scenario if you are relatively comfortable in your marriage,” says Sorkin.

And you should include a disclaimer that gives your spouse the final say. That way, a widow or widower has the option, but “is not forced to do one thing or the other,” says Timothy M. Hayes, president of Landmark Financial Advisory Services LLC.

4. Loan assets to family members

Bet you never thought you’d hear a financial planner tell you to make a loan to your relatives. But it can be a great way to keep growing assets from sabotaging your estate plan. By loaning an asset, the property itself will still be included in your estate, but the amount it appreciates while out of your care will not.

Here’s how it works: You have $100,000 worth of real estate property and you expect it to double in value over the next 10 years. You loan that property to your son, in exchange for a $100,000 note plus interest. In 10 years, your estate contains $100,000, plus some interest, while your son has a $200,000 piece of property.

The loans work equally well with money, says Kirchick. You can invest $2,000 in the stock market, make $100 on it and leave your daughter that $2,100 in your estate. Or you can loan $2,000 to your daughter and have her invest it. She pays you back the $2,000, plus an amount of interest. But the profit of $100 is hers, not part of your estate.

“Since interest rates are so low, the question is, ‘Can I do better investing the money than the interest rate of the loan?'” says Kirchick. “That’s where the borrower could come out ahead.”

5. Sell assets to your heirs

Instead of making an asset loan, consider selling the property to your family. You can sell a house and make up to $250,000 ($500,000 for a couple) before owing any capital gains tax, says Sorkin. Sell within the same year of a death, and the surviving spouse can claim the full $500,000 exclusion.

Say you paid $200,000 for a house that’s now worth $1.2 million. If your spouse dies, you can add (and exempt from capital gains) half the fair market value of the house ($600,000) to what you paid ($200,000), so that the capital gains tax meter starts rolling at $800,000. That leaves you a taxable profit of $400,000.

But if you sell the home within that same year, you can use the joint exemption of $500,000 from capital gains, says Sorkin, meaning you can sell your home for up to $1.3 million ($800,000 plus $500,000) without triggering capital gains.

Make that sale to a family member and you have now frozen the value of your home at the sales price, because only the note, and not the appreciating asset itself, is part of your estate. If you die before the note is paid, you can leave provisions to forgive the debt in your will.

This isn’t a good option if you suspect there’s the slightest chance your kids would kick you out of the family homestead. And for your protection, you should include a clause that will allow you to rent the home at the lowest fair-value rate.

6. Reduce your pension plan

In terms of being taxable, “one of the worst assets you can have is a pension plan that has a tremendous amount of money in it,” says Sorkin. He suggests that as you enter your 60s, figure out how much money you can take out annually without being bumped into a higher income tax bracket, as well as what you’re going to need down the road. You don’t have to spend it all; sock some away in another savings vehicle.

7. Watch your insurance

Estate tax is not always an upper-income problem. If you have $2 million in life insurance, that alone could subject your estate to federal taxation. Landmark Financial’s Hayes says the key is finding a way to keep the non-exempt amount out of your estate. And it’s a lot easier if you have several policies that add up to $2 million, rather than a single policy.

The most-common strategy, he says, is to put $500,000 or more worth of policies in an irrevocable trust. But remember, says Hayes, the premiums have to count against that person’s gift exclusions.

8. Buy insurance to pay your estate taxes

Some insurance, however, could help at estate tax time.

“Create an irrevocable life insurance trust for the purpose of purchasing a life insurance policy and the proceeds are used to pay the estate tax,” says Ric Edelman, author of “The Truth About Money.”

“You should focus on this as soon as your net worth is above $3 million or $1.5 million if you’re single.”

The policies are a good buy, he says: “It can be pennies on the dollar for a high net worth family.” Just be sure to buy permanent, not term, insurance, notes Edelman, because “we need to know this money will be there for the heirs, that it’s something guaranteed.”

9. Consider a second-to-die policy

“It’s a common tool that a lot of my clients use,” says Sorkin. It’s a chunk of money that pays out when the second half of the couple dies “and it’s cheaper [than regular life insurance] because it’s joint life,” he says. Put it in an irrevocable trust so that the asset isn’t counted as part of the estate. And remember that the premiums count against your annual gift exemption to the beneficiary.

10. Form a company

People who hold substantial real estate often create a family company, either a limited liability company or limited liability partnership, says Sorkin.

“This form of gifting works extremely well for families who are land-rich and cash poor,” says Sorkin. “Basically, they put the real estate into this partnership, and they can use their annual gift exclusion to make gifts of equity to their children.”

Once the senior generation owns less than 50 percent in the company, they might even be able to discount the value of their company ownership, thereby reducing its value when it comes to setting an estate’s worth, says Sorkin. The reasoning is that a non-controlling interest in a company is inherently worth less. But the IRS monitors discounting very closely, so Sorkin recommends you get an appraisal and be conservative in your estimates.

There are no estate taxes when the children inherit, but there could be some income tax, says Kirchick. And they can’t convert assets into cash overnight.

“That’s one of the rubs,” he says, ” you can’t just liquidate [the company] when you need the money.”

Dana Dratch is a freelance writer based in Georgia.

More From Bankrate