A durable power of attorney can be a very important estate planning instrument. A power of attorney allows a person you appoint -- your "attorney-in-fact" -- to act in your place for financial purposes when and if you ever become incapacitated.

In that case, the person you choose will be able to step in and take care of your financial affairs. Without a durable power of attorney, no one can represent you unless a court appoints a conservator or guardian. That court process takes time, costs money, and the judge may not choose the person you would prefer. In addition, under a guardianship or conservatorship, your representative may have to seek court permission to take planning steps that she could implement immediately under a simple durable power of attorney.

A power of attorney may be limited or general. A limited power of attorney may give someone the right to sign a deed to property on a day when you are out of town. Or it may allow someone to sign checks for you. A general power is comprehensive and gives your attorney-in-fact all the powers and rights that you have yourself.

A power of attorney may also be either current or "springing." Most powers of attorney take effect immediately upon their execution, even if the understanding is that they will not be used until and unless the grantor becomes incapacitated. However, the document can also be written so that it does not become effective until such incapacity occurs. In such cases, it is very important that the standard for determining incapacity and triggering the power of attorney be clearly laid out in the document itself.

While you should seriously consider executing a durable power of attorney, if you do not have someone you trust to appoint it may be more appropriate to have the probate court looking over the shoulder of the person who is handling your affairs through a guardianship or conservatorship. In that case, you may execute a limited durable power of attorney simply nominating the person you want to serve as your conservator or guardian. Most states require the court to respect your nomination "except for good cause or disqualification."

Under the tax law enacted in 2001, whatever you own is subject to the federal estate tax upon your death, until 2010. For the year 2010, estates will be entirely free from federal taxation. The law that includes this provision expires at the end of 2010. After 2010, the estate tax rules will then revert to those prevailing in 2001.

For 2002, the tax rate on estates begins at 41 percent and rises to a maximum of 50 percent, depending on how much is being passed to your heirs. Between 2002 and 2009, the top tax rate will gradually be lowered to 45 percent.

However, not all estates will be taxed while the estate tax is in effect. First, spouses can leave any amount of property to their spouses, if the spouses are U.S. citizens, free of federal estate tax. Second, the estate tax applies only to estates valued at more than $675,000 in 2000 and 2001. This amount will rise to $1 million in 2002 and then increase incrementally until it reaches $3.5 million in 2009. The federal government allows you this tax credit for gifts made during your life or for your estate upon your death. Third, gifts to charities are not taxed.

Making Gifts: The $11,000 Rule

A simple way you can reduce estate taxes is to give some or all of your estate to your children (or anyone else) during their lives in the form of gifts. There is no actual limit on how much you may give during your lifetime. But if you give any individual more than $11,000 (or $10,000 until the end of 2001), you must file a gift tax return reporting the gift to the IRS. Also, the amount above $11,000 will be counted against the $1 million unified credit equivalent (for 2002 and 2003) that you may give tax free during your life or upon your death.

The $11,000 figure is an exclusion from the gift tax reporting requirement. You may give $11,000 to each of your children, their spouses, and your grandchildren (or to anyone else you choose) each year without reporting these gifts to the IRS. In addition, if you're married, your spouse can duplicate these gifts. For example, a married couple with four children can give away up to $88,000 in 2002 with no gift tax implications. In addition, the gifts will not count as taxable income to your children (although the earnings on the gifts if they are invested will be taxed).

Charitable Gift Annuities

Another way to remove assets from an estate by making a charitable contribution is to set up a charitable gift annuity, or CGA. A CGA enables you to transfer cash or marketable securities to a charitable organization or foundation in exchange for an income tax deduction and the organization's promise to make fixed annual payments to you (and to a second beneficiary, if you choose) for life. A portion of the income will be tax-free.