(FORTUNE Magazine) – Keeping your wealth in the family gets more complicated with each passing year. Indeed, recent changes in the tax laws have made some folks less concerned about the Pale Rider than about the tax collector. Jack Babbitt, a 66-year-old Oklahoma entrepreneur with a sizable and tortuously complicated collection of assets, has given the matter a great deal of thought. His conclusion: ''Dying ain't nothing compared to figuring out the tax code.'' Some basics haven't changed: If your estate comes to $600,000 or less, you can still bequeath it tax-free. Above $600,000, the federal government still levies an estate tax of 37% to 55%, and every state takes a bite (see chart). No matter what your net worth, you can leave everything to your spouse, or to charity, or to some combination of the two, tax-free. But for families with more elaborate aspirations and substantial means, new wrinkles in the law are playing havoc with tried-and-true ways to keep death duties down.

Most of the changes affect trusts, the backbone of estate planning. These handy legal arrangements allow you to spell out in detail how your assets are to be managed when you're gone. They can save you and your heirs tax dollars by keeping assets out of your taxable estate. Alas, new IRS rules have tightened restrictions on charitable remainder trusts, grantor retained income trusts (GRITs for short), and even such plain-vanilla vehicles as irrevocable life insurance trusts. The rules are roughest for anyone who hopes to pass control of a family-owned business on to the kids. Staying on top of all the changes is a full-time job and not for the faint of heart. So it's wise to seek expert help, just to make sure all the contingencies are covered. Says lawyer Jere McGaffey, a partner at Foley & Lardner in Milwaukee: ''Anyone who hasn't revised his or her estate plan in the past year or two really needs to go back and take another look at it.'' Time is running out fast for one hefty tax break. The Tax Reform Act of 1986 sharply increased your chances of being hit with a higher generation-skipping transfer tax on money you give or leave to your grandchildren. Thanks to vigorous lobbying by the winemaking Gallo family, Congress added a provision to the law that temporarily allows families to soften the blow by giving money to the grandkids now. The so-called Gallo exemption disappears on January 1, 1990, however, so estate planners are urging grandparents with estates of $3 million or more -- and a willingness to part with a big chunk of their assets -- to take advantage of it now. Consider the difference a day makes. On December 31, 1989, a grandparent who has made no other taxable gifts can give a grandchild a maximum of $600,000 tax-free. On January 1, the party's over. That same $600,000 gift will cost Grandma or Grandpa well over $1 million -- $600,000 for the gift, $330,000 for the new generation-skipping transfer tax (a flat 55%), and $125,700 in gift taxes on the $930,000. Less drastic, but still unpleasant, are some changes in the way the IRS will treat two old favorites, charitable remainder trusts and GRITs. A charitable remainder trust invests the principal and makes annual payments to one or more beneficiaries you have named. When the trust is dissolved -- say, upon the beneficiary's death -- the assets remaining in it go tax-free to whatever charity you have chosen. When you die, the IRS determines how much of the principal is likely to be left for the charity by the time your beneficiary is finished taking payments and reduces your taxable estate by that amount. Until now, in making its arcane calculations, the IRS has used outdated actuarial tables that considerably underestimate the life expectancy of beneficiaries, thereby overstating the amount that will be left when they join you in the Great Beyond. Having wised up to the fact that people are living longer and taking those annual payments for many more years than they used to, the taxmen revised their tables, effective last May. As a result, the federal levy on charitable remainder trusts could increase significantly. Says Susan Brachtl, a senior vice president in estate planning at U.S. Trust Co.: ''The changes in the life-expectancy tables will make these trusts less attractive to people with young heirs.'' The IRS has likewise sunk its teeth into GRITs, which have long been a nifty way to freeze the value of your assets. A GRIT will remove them from your taxable estate, however, only if you outlive the term of the trust. If you die before the GRIT expires, the assets in it are taxable. You funded the trust with securities, cash, or whatever, and kept the income or used the property for the duration of the trust. The IRS would let you fix the length of the trust and name yourself trustee, thus leaving you in control of the assets until the trust dissolved and the principal was distributed to the beneficiary. You paid a gift tax when you set up a GRIT if the assets in it were worth more than $600,000, but after that the assets appreciated tax-free. In defiance of experience, the IRS used to figure that the value of the trust declined by the time your heirs got hold of it, so that a GRIT with $1 million in assets, for example, was deemed to be worth only $400,000 after ten years. Hence the standard $600,000 exemption sheltered it amply. This kind of * thinking applied even to GRITs stuffed with California real estate that had appreciated madly. The reason: The IRS looked only at the value of the goods at the time you established the trust, and then deducted an opportunity cost. This figure was based partly on the Treasury's expectations of inflation's ravages and partly on the dubious assumption that had you given your heirs the money instead of tying it up in a trust, they would have invested it and earned a fat return for lo these many years. By this reasoning your heirs actually lost money while they waited for your trust to run its term. GRITs aren't so generous anymore. New IRS regulations have sharply restricted the assets that you can stash in one to cash, marketable securities, or income-producing real estate. The term of a GRIT cannot exceed ten years, which makes the future value of the remainder greater, and the tax break smaller, than for the longer-term GRITs of yore. Moreover, the IRS seems to have caught on to the opportunity-cost loophole. The tax folks used to calculate what your heirs could have been earning on your money by consulting a set of tables that assumed fixed interest rates. Now the rate used to calculate opportunity cost is based on the average rate on 30-day Treasury bills in the month you establish the trust. To do best by your heirs -- that is, to maximize their hypothetical opportunity cost and whittle their loss to taxes -- you should set up your GRIT in a month when rates are at their peak. This requires that you be an ace interest-rate forecaster, a rare bird indeed. One more thing: You can no longer name yourself a trustee of your own GRIT, which means you have far less control of the assets in it than before. A GRIT still has the virtue of sheltering whatever is in it from estate taxes, but the train doesn't carry as much gravy as it used to. Other alterations in the tax code are more subtle. Take irrevocable life insurance trusts. This venerable way to remove your life insurance proceeds from your taxable estate requires that you set up an irrevocable trust, assign your policy to it, name your beneficiaries, and have your trustee pay the premiums out of money you contribute to the trust. You may owe some gift tax with this maneuver, and you give up the right to borrow against the policy, but that is normally a small price to pay for funneling the entire proceeds to your heirs tax-free upon your death. Irrevocable life insurance trusts have lately become more complicated. Naming your spouse as beneficiary is no longer a good idea. Says Alexander A. Bove Jr., author of The Complete Book of Wills and Estates: ''The IRS has decided that a husband and wife are legally a single unit. So leaving the money in the trust to your spouse is technically the same as leaving it to yourself. It goes back into your taxable estate.'' Assuming your goal is to have your kids get the loot tax-free, you should make them the beneficiaries. The IRS issued a new 70-page rule in September, known as Notice 89-99, that affects life insurance trusts. Before scrapping your old trust or starting a new one, you might want to consult your lawyer. For most people, sensible estate planning is a reasonably straightforward exercise. Ira Weinman, 32, is a vice president at BT Securities, the trading arm of Bankers Trust Co. in New York City. His wife, Sherrin, 29, a personnel recruiter, is on maternity leave for the birth of the couple's first child. The Weinmans never even thought about making a will until they found out the baby was coming. Says Ira: ''Working on Wall Street, you can accumulate assets quickly, but you also have a nagging feeling of insecurity because it isn't a stable environment. Knowing that my wife and our child will be taken care of financially if anything happens to me gives us a certain peace of mind.'' In addition to their will, the Weinmans had Bove, who is their attorney, draw up a revocable trust, also known as an inter vivos, or living trust, because you retain full control of the assets while you are alive. The couple funded the trust with cash, securities, and a condominium they own as an investment. Though keeping control over the assets means they will remain in the couple's taxable estate, a revocable trust permits the Weinmans to keep the disposition of their affairs private. Wills are filed with the state after death and become public documents, but the instructions attached to a revocable trust are sealed forever from the curious eyes of strangers, ex- spouses, and disinherited nephews -- not to mention nosy journalists.

The real appeal of a revocable trust, however, is that it keeps your estate out of probate court. That can save your heirs considerable time and expense. Some tax experts believe that anyone who owns real estate of any kind should set up a revocable trust pronto, especially in states like California, where the cost of probating a will is inordinately steep. Kevin Fehrmann, an attorney who specializes in estate planning in Newport Beach, California, offers the following grim example: Suppose you do not set up a trust but leave your child a $400,000 house with a $350,000 mortgage. Unless the kid has a pile of ready cash on hand to pay the lawyers' fees, he or she may not inherit your house as you intended. Why? Because in California the law dictates a munificent fee schedule for lawyers and executors who guide an estate through probate. In the case of the house, the law also stipulates that the probate attorney and executor are entitled to base their fees not on your $50,000 equity but on the entire $400,000 value. Those legal fees come to 4% of the first $15,000, 3% of the next $85,000, and 2% on each $100,000 in assets thereafter. So on that $400,000 property alone, the attorney who represents your estate in probate court earns a $9,150 fee. If your executor (usually a close relative) also decides to collect his or her statutory fee, add another $9,150 -- and presto, the child who inherits your house owes at least $18,300 for the privilege. Says Fehrmann: ''If your heir can pay, fine. But either way, without a revocable trust you are guaranteeing some lawyer a nice piece of change.'' One client who took Fehrmann's warning to heart is Ron Moceri of San Clemente. Moceri, 43, a former insurance company executive, started his own business, Financial Services Unlimited Inc., in 1981. He and his wife, Carol, 42, own three houses -- a home in Laguna Hills, a vacation getaway in Palm Desert, and a rental property in Apple Valley -- and all three are safely tucked away in a revocable trust with their 21-year-old twins, a son and a daughter, as beneficiaries. Both the Weinmans' and the Moceris' estate plans also include what some lawyers call ''remarriage insurance.'' If you are married and especially if your net worth exceeds $1.2 million, your lawyer may suggest that you provide adequately for your mate after your death but prevent him or her from passing any of your hard-earned capital on to a subsequent spouse. The vehicle of choice is a qualified terminable interest property (QTIP) trust, which allows your spouse to collect income and, if you so state, some of the principal. But your better half has no say over who gets the assets once he or she has followed you into eternity. Most people who set up QTIPs provide that the remainder goes to the children. Single parents face estate-planning challenges that are trickier than most. Jack Gallagher, 43, a film production executive who lives on Balboa Island in California, is raising 16-year-old Sean by himself. ''I haven't got any relatives, and Sean's mother left the country in 1981,'' says Gallagher. ''My son could easily wind up in the hands of strangers.'' To address that concern, Gallagher made a will designating two close friends as Sean's guardians in the event that a catastrophe occurs before the boy turns 18. He also followed Kevin Fehrmann's advice and set up a revocable trust with Sean as the sole beneficiary. In Gallagher's case the trust makes particularly good sense because he owns assets both in California and in Texas. Says Fehrmann: ''This way Jack can avoid probate in both states.'' Most experts agree that anyone with assets in more than one state should follow Gallagher's example. (For a look at how state residency laws can affect estate planning, see box at end of story.) The knottiest planning problems await people who hope to leave a family business to their children. Of all the recent changes in the tax law, none has come close to stirring up the furor aroused by section 2036(c) of the Internal Revenue Code, which slipped into the Revenue Act of 1987. It governs the passing of family-owned businesses from one generation to the next. It is so onerous and unclear that the American Bar Association has been trying for over a year to get it repealed. In the past, business owners who wanted to hand over their companies to their kids had a pair of appealing options. The first was to issue two classes of stock -- dividend-paying preferred shares, which the parents keep, and common shares, reflecting any appreciation in the company's net worth, which go to the kids. The effect was to freeze the value of the business in the parents' estate for tax purposes while guaranteeing them continuing income from it. The other strategy: an installment sale, which enabled the children to buy the company by making annual payments to their parents until the parents died or the children bought the business outright, whichever came first. Both these tidy schemes have been eliminated by 2036(c). Now, to keep your company's ever-rising worth out of your taxable estate, you must relinquish all connection to it -- including preferred dividends. The terms of an installment sale have become nightmarishly complex. Warns Jere McGaffey: ''You must make sure you have absolutely no equity or interest left in the business at the time of your death or else the entire value of the company may revert to your taxable estate.'' Thus, you must be able to predict with some accuracy when you are going to die. Although 2036(c) is couched in such fuzzy and all-encompassing language that tax lawyers have yet to work out its full implications, a few brave souls are attempting to get around it. One of them is Jack Babbitt, the founder and owner of Devco, a chemicals company based in Tulsa with a complicated constellation of interests in petrochemical companies situated in California, Canada, Saudi Arabia, and Chile. Babbitt, who was married for 39 years, widowed, and remarried, has three children in Tucson, Arizona; Los Angeles; and Midland, Texas. His goal is to pass equal ownership of Calsulco, an 80%- owned subsidiary of Devco, to his son, who is now running it, his two daughters, and their respective spouses. Babbitt sought the advice of Charles Rains, an attorney at Sutin Thayer & Browne in Albuquerque, New Mexico, who specializes in brain twisters like this one. Rains has stitched a crazy quilt of trusts, gifts, and guesswork. First, the Helen Babbitt family trust, created by Babbitt's first wife with Babbitt and his kids as beneficiaries, bought 40% of Calsulco's closely held stock. Next, a 40% chunk of the company's tangible assets went into a GRIT, with the new maximum allowable term of ten years. Third, Babbitt and his wife are giving a total of $120,000 worth of Calsulco's common stock to the three children and their spouses each year for the next five years -- the maximum the couple can give without incurring gift taxes. ''By using a GRIT we've in essence tied Jack to the ten-year term,'' notes Rains. ''If he dies before the trust expires, everything goes back into his taxable estate.'' Or as Babbitt puts it, ''Dying in the next ten years would be real bad tax planning.'' No matter how many trusts you have, and however ingenious their construction, you still need a will. Assets you use all the time -- checking accounts, cars, jewelry, and other day-to-day pleasures and necessities -- aren't trustworthy, so to speak, but they are still worth passing on. A will attests to your intention that someone after you should enjoy, enjoy. Ernest Milani, 60, took this notion to heart. He is the Northeast president of CDI Corp., an engineering and technical services company headquartered in Philadelphia, and his will is 80-odd pages long. In it Milani has spelled out the disposition of the family antiques and % jewelry to help prevent squabbles among his three grown daughters and one son. And then there is the wine. His cellar has more than 3,000 bottles, willed to various oenophile friends. ''I'm trying to drink it all before I go,'' he jokes, ''but I may not make it.'' Milani's estate plan has another unusual feature: a memorial trust from which the income will buy a round of drinks for the house at his favorite tavern every year on his birthday. ''It started as a lark,'' he says, ''but then it turned serious.'' His will covers a number of contingencies, such as what happens if the bar goes out of business (the free toasts will be raised in another location), and even provides for the bartender's tips. This liquid memorial should last about a century after Milani's death. Says Alexander Bove, the Boston attorney who helped him draw up his will: ''By that time people will probably have forgotten who Ernie was, but they'll no doubt gladly toast him anyway.'' Even if you can't take it with you, you can arrange to leave 'em laughing when you go.