Most people don't realize that we have two systems of taxation. One taxes income as it's earned; the other taxes wealth as it changes hands. During a person's lifetime, we call this transfer tax the gift tax. At his or her death, we call it the estate tax, and it could carry significant tax consequences for you and your beneficiaries.

That's why estate planning is so important.

Should you worry about the estate tax?

Each state has its own rules for state inheritance taxes. And then there's the federal estate tax.

Map: How your state ranks

For 2007 and 2008, there's no federal estate tax if your estate is worth $2 million or less.

For the vast majority of Americans, that ends the discussion.

Even if your income is modest, however, you may not be off the hook. Do you live in a community where real-estate values have risen sharply and you've owned the property for a very long time? Have you built up a stake in a company whose stock has shot sky-high over the years, like, say, Google? If you fall into one of these scenarios, pay attention.

The $2 million "exclusion amount" increases until 2010, when it becomes unlimited for a year. That means no federal estate tax, regardless of how big an estate you leave.

I expect to see lots of dying rich people hooked up to machines at the end of 2009 to keep them alive until 2010.

Prediction: Big changes to the estate tax

But we're talking about the IRS here, so nothing is simple. Die on Dec. 31, 2010, and you pay zero estate tax. Die the next day and the exclusion amount is scheduled to drop down to $1 million. That's why it's so important to sit down with a professional if you think your estate might be big enough for the tax to hit.

Calculator: Estimate your taxes

Congress has been talking about amending the estate tax rules for two years now, with no progress. Nothing will be done until after the 2008 elections. I suspect at that time we'll get an exclusion of about $3.5 million per person, which, with a properly drafted will, will exclude estates of $7 million or less for married couples.

In the meantime, be careful! Simple things can empty your pockets. For example, if you leave 100% of your assets to your spouse, your estate pays zero tax because of the marital deduction. But, you're losing the

value of your exclusion and potentially subjecting an additional $2 million-plus to taxes when your spouse dies. Your children will not be happy!

If you're going to be a potential victim of this "death tax," start planning now. People don't plan to fail, they fail to plan. The earlier you start planning, the more opportunities you have to minimize or potentially eliminate this tax hit.

What to look for in an estate planner

See an attorney or financial planner who specializes in estate planning. Don't try this yourself. You don't do your own surgery do you? Have your will appropriately written and updated. Consider whether a Family Limited Partnership, a Charitable Remainder Trust, or a Grantor Retained Income Trust would be appropriate. If your assets are going to be subject to the estate tax, make sure your insurance is owned and payable to an Irrevocable Life Insurance Trust to remove those dollars from a tax hit. If your wealth is primarily in non-liquid assets (real estate), consider additional life insurance to provide the liquid dollars to pay the tax when due so those assets don't have to be sold within nine months of your death.

I've literally saved clients millions of dollars by employing the above strategies and techniques. Who do you want to get your money, the IRS or your kids? And, money spent for estate planning to reduce the tax hit is currently deductible on your income tax return. (Use our deduction finder for more ways to save.)

Visit MSN Money's Tax Center and Estate Planning Center for additional advice and tips.

Published March 14, 2008