Strategies to reduce estate taxes can be esoteric and complicated, and often require the help of professional advisors. But virtually all these strategies start with an estate planning tool that every household should be familiar with: the gift-and-estate-tax unified credit.

You may already be generally familiar with the unified credit. Often it’s referred to as the estate tax exclusion or exemption. For years, that exclusion amount was $600,000-the first $600,000 or value in your estate was exempt from federal gift and estate taxes. In 1997, Congress passed a law ratcheting up the exemption amount. For 1999, the first $650,000 in an estate is exempt from federal gift and estate taxes.

Technically, the estate is credited, or in essence forgiven, the taxes that would normally be owed-up to $211,300 on the first $650,000 in 1999. In 2000, the exemption rises to $675,000 ($220,550 in taxes), and by 2006 the exemption will top out at $1 million ($345,800 in taxes). Any estate value that exceeds the appropriate year’s threshold is taxed at a rate starting at 37 percent and quickly climbing to 55 percent (60 percent in certain situations).

This is commonly referred to as a transfer tax. When you permanently transfer estate property to someone other than your spouse for less than adequate consideration of fair market value, you owe federal (and perhaps state) tax on that transfer. If you transfer the property during your lifetime, it’s a gift tax; at death, it’s an estate tax. The tax rate structure is the same for either type of transfer.

Transfer taxes are unified in that the unified tax credit takes into account both lifetime gifts and transfers at death. For example, if you give away $300,000 in taxable gifts during your life, that $300,000 counts against the unified credit you would be entitled to at the time of your death. If the total of your gifts and the value of your estate at death exceed the exemption amount, you’ll have a tax liability. Say you make $300,000 in lifetime gifts and your remaining estate is valued at $600,000 at death in the year 2000. The sum of your lifetime gifts and estate would be $900,000. Of that, the unified credit would shelter $675,000, leaving $225,000 subject to estate tax.

One reason it’s important to understand how the gift and estate tax components interact involves gifting. Each taxpayer is allowed to gift up to $10,000 a year tax free to another individual. That gift exemption is indexed and will eventually rise (in $1,000 increments) to $11,000, $12,000 and so on. The taxpayer and their spouse can jointly gift $20,000 a year to an individual.

These annual $10,000 gifts do not count against your unified credit. For example, you could gift $10,000 a year to ten children and grandchildren and the total $100,000 in gifts ($200,000 if done as a couple) would not eat into your unified credit amount. However, gifts that exceed $10,000 in one year to one person reduces the amount of unified credit. Say you give away $60,000 to a nephew in 2000 — $50,000 will be counted against your total unified credit.

As you can see, gifting during lifetime can be valuable. Say you gift $200,000 during your lifetime in amounts that stay under the $10,000 exemption and your estate is valued at $675,000 at your death in the year 2000. Then you owe no estate or gift taxes. However, if you don’t make those $200,000 in gifts during your lifetime, then your estate is worth $875,000 at your death, and the $200,000 is taxed. In fact, your estate probably would be worth more than the $875,000 because assets you didn’t gift probably would have grown in value. In short, you can’t make up at death for those lost opportunities of making $10,000 annual gifts.

Understanding the unified credit concept, and knowing how much unified credit you’ve used up, is also a critical factor when considering more advanced estate planning techniques, such as credit shelter trusts. For example, husbands and wives often leave each other all their assets, tax free. However, when the surviving spouse eventually dies, only his or her unified credit is available. The unified credit of the spouse who died first can’t be used, so it is “wasted.” A unified credit is a terrible thing to waste.