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When you give away assets, they are not part of your estate tax calculation if they are covered by the annual gift tax exclusion or other gift tax exclusions. If you feel comfortable giving up control of a portion of your assets, and you are leaving your surviving spouse adequate funds to live reasonably well, this is a very effective way to transfer assets out of your estate at a reduced cost.

You may have assets that you expect to appreciate in value. If this occurs, your estate will have to pay tax based on the fair market value at the time of your death. If you give these assets away now (presumably to the people who would ultimately inherit them when you or your spouse dies) the gift would be based on today's value. All appreciation from today, until the day you die, escapes estate tax.

If you plan carefully, you can avoid gift taxes by using the annual gift tax exclusion as well as the exclusion for medical or educational expenses; see the section Estate and Gift Taxes. Remember to consider giving gifts to minors and young adults by using trusts. Speak to your attorney or other estate planning professional to see how you can get credit under the annual exclusion and use a trust at the same time.