The disposition of an individual's estate need not be a guessing game. Yet many people are unaware that by establishing a sound estate plan they easily may shelter many holdings from probate. Still more don't know the principles behind assessing their estate. But by better understanding how the federal government governs estate taxes, people may avoid or reduce the future federal tax liabilities. This tax savings can preserve assets in the estate that otherwise might be used to pay death taxes. These assets then may be passed on to a spouse, children, or charity. There are several steps to take in evaluating your estate. First, determine the nature and the value of your estate's assets. Assts may include: your residence, other property such as a vacation home, household furnishings, savings bonds, stocks, checking and savings accounts, pension benefits, life insurance policies, automobiles. For federal tax purposes, there are several exceptions to determining the value of an asset: - For jointly owned assets held by spouses, only half the value of the asset is included in your estate if you are the first spouse to die. - For life insurance policies, the amount included in your estate is the face amount of the policy rather than its replacement cost or present cash value (if whole life) at the date of your death. - If you die before retirement, you receive none of your pension. However, half the value of the pension is payable to your spouse and half the vested plan benefits - what would have been available to you had you lived to retirement - are included in your gross estate. - Finally, Series EE bonds are included at their present value when they mature. - All other assets generally are included at fair market value. Second, determine your deductions when calculating federal estate tax. Include funeral expenses, costs of the last illness of the decendent, if applicable; unpaid debts and mortgages; and administrative expenses for the estate. You'll incur fewer administrative expenses for assets transferred outside of the probate. To avoid probate, you may set up a living trust, although it will create some trust administration costs. In addition, property held in joint tenancy with right of survivorship automatically passes to the surviving joint tenant outside the probate process. Other property of a contractual nature - such as life insurance policies or qualified pension plans - also will transfer to the beneficiary outside of probate. Step three, determine which property qualifies for the marital deduction or charitable deduction. Three factors make a difference: - If your will transfers property to your spouse, this property qualifies for the marital deduction. - If any property is held in joint tenancy with right of survivorship, the property passes to the surviving spouse and qualifies for the marital deduction. - If any life insurance or qualified pension plan names your spouse as policy beneficiary or plan benificiary, this, too, qualifies. The same kinds of arrangements will qualify property for the charitable estate tax deduction if property is left to the charity as a result of a will, a specific property designation such as a joint tenancy, or a contractual benificiary designation. Any property qualifying for the marital deduction or the charitable deduction is not subject to federal estate tax liability. Remaining property is referred to as the taxable estate. The fourth, and final, step is to determine estimated federal tax liability on the taxable estate. The unified estate and gift transfer tax rates apply to the taxable estate when calculating the amount of federal estate tax. Every individual, regardless of the size of his or her estate, is entitled to a unified credit of $192,800 that absorbs, dollar for dollar, the amount of that individual's federal estate tax liability up to that amount. This assumes that you did not make any lifetime gifts to an individual in any one year while alive that exceeded the amount of the gift tax annual exclusion amount of $10,000. Here, a rule of thumb applies. For your federal estate tax liability to be greater than $192,800, your taxable estate must be greater than $600,000. As long as a husband and wife each hold $600,000 in separately owned assets, the couple can own a total of $1.2 million in assets and the entire amount for both estates avoids federal estate tax liability. The process of rearranging property ownership for estate assets, so that each spouse's estate takes maximum advantage is known as ``estate equalization.'' Many people assume they won't have assets exceeding $600,000, but in these days of appreciated home values and sizable pension plans or life insurance policies, estates are often of surprising size. --- EDITOR'S NOTE - Paul Lochray is an academic associate in the estate planning division of the College for Financial Planning in Denver.