Here's a scary thought: Without advanced estate planning, over half your estate could get gobbled up by estate taxes! This is especially true if you have over $2,000,000 in assets in 2007. (Aren't you fortunate!)

Since one of your largest assets is your house, one of the first ways to cut your estate tax is to get your house out of your estate. But don't just give your home outright to your children or other loved ones, or they will acquire the home at your cost basis (what you paid for the house). Since your children pay capital gains taxes on the difference between how much your house is worth now and how much you paid for it, they'll probably take a pretty big tax hit.

For example, say you own a house now worth $500,000 that you bought for $100,000. Give away your home outright and your children would have to pay a hefty capital gains tax on that $400,000 increase when they sell the house.

Instead look at better ways (depending on your situation) to give your home away. The strategy that's best for you depends on what you want to accomplish, but here are a few we think are worth looking into:

1. Create a Qualified Terminable Interest Property (QTIP) Trust. Use this strategy if you want to leave your home to your spouse, but you want to control who gets the house after your spouse dies. For example, say you're in a second marriage and you want to ensure that your spouse has a home, but you also want to make sure that your children from your first marriage are provided for. With a QTIP trust, your children will get the home after your spouse dies. Your children still inherit the home at a stepped-up cost basis—as of the date your spouse dies. When your spouse dies, the value of your home will be included in the estate.

2. Create a life estate trust. With this strategy, you transfer the property to your children, but you can live in your home until you die. At the time of your death, your home then goes directly to your children, at the current fair market value on the day you die. If your children then want to sell the home, they aren't hit with huge capital gains taxes.

You also avoid probate with a life estate trust since the property passes automatically to your children. However, your home's value never leaves your estate. So once you die, there's no avoidance of estate taxes.

3. If slashing your estate taxes is a priority (more so than passing your home to your children at your cost basis), you should create a Grantor Retained Income Trust (GRIT). The biggest estate planning benefit of this strategy is that the current value of your home is no longer included in your taxable estate—it belongs to the trust. This is a good strategy if you want to give your home to your children or other loved ones and get your home's value out of your estate.

We especially like GRITs, but, boy do you have to follow the rules. You save a great deal of money on estate taxes and you can keep living in your home for many years.

Here's how it works. You set up an irrevocable GRIT, transfer your home's deed into the trust and retain the right to live in the house for 10 years. After 10 years, the trust ends and the house goes to your children. Your children receive the deed to your home, and your children's cost basis will be the original purchase price. If you're still living after the 10 years are up and you want to stay in your home, you simply pay a fair market rent to your children.

GRITS are great (say that 10 times fast!), but they do have a serious disadvantage we want to be sure you know about - it takes 10 years to get your home out of your estate. Under the trust, your children get a "remainder interest" in the property, and the trust owns the current interest, or current value of your home. You retain the right to live in your home, rent-free for the next 10 years. If you die before the 10 years are up, the value of the outstanding remainder interest goes back into your taxable estate.

Related Links:

• The Best Way to Draft Your Will
• Avoid Paying Taxes on a Big Estate