(FORTUNE Small Business) – From an Estate Tax standpoint, 2010 would be the best year to die, but Illinois would not be the place to do it. That's the grim conclusion of Robert Bonifas, 66, who worked 35 years to build his company, Alarm Detection Systems of Aurora, Ill., and now wants to pass it on to his children. With a business he estimates will be worth as much as $40 million in the next decade, Bonifas realized long ago that his heirs could be forced to either sell the company or borrow against it to pay millions in estate taxes.

Though the federal estate tax is set to phase out by 2010--and be reinstated in 2011, unless Congress acts--many states, including Illinois, New Jersey, and New York, have recently taken steps to increase their estate tax. "Most business owners are probably not aware of the rapidly moving law at the state level," says David Waldo, an estate lawyer with Advest, a financial advisory firm in Columbus.

To minimize his taxable estate, Bonifas has spent the past 20 years giving company shares to trusts held by his kids and grandkids and to his CFO, a close friend. Bonifas estimates that he spends $82,000 a year on estate planning. The paperwork is mountainous--each trust must file federal and state taxes quarterly (108 tax returns for the family each year).

Bonifas hoped he'd eventually be able to stop the estate-planning madness when the federal phaseout was passed in 2001. But as the federal tax goes away, the U.S. government passes less money to the states each year. In response, some states have started levying their own tax. It's called "decoupling" the state estate tax from the federal, and it's enough to make Bonifas consider moving. "I'm a resident of Illinois, but enact a big estate tax and I probably won't be," he says. If you're a business owner in this situation, should you pack your bags? Experts say that in light of the changing rules at both state and federal levels, there are several steps to consider first.

BUY MORE LIFE INSURANCE. If the value of your business is tied up in illiquid assets, using life insurance to pay estate taxes could prevent a forced sale. To avoid having the insurance proceeds counted as part of your taxable estate, establish an irrevocable life insurance trust. That type of trust is particularly well suited for business owners who have assets exceeding the $1.5 million that's excluded from federal estate taxes for tax year 2003 ($2 million in 2004).

START OR ACCELERATE ANNUAL GIFTS. The law allows you to give away a total of $1 million to any person or group over your lifetime without incurring gift taxes. Plus, you can give any individual another $11,000 a year gift-tax-free. (The two tallies are tracked separately.) Start as early as possible, even in your 40s if you can afford it.

"With a successful business, you can't give it away fast enough," says Bonifas. Either give shares outright or establish a trust, such as a generation-skipping trust (also known as a dynasty trust). This arrangement--designed to qualify for the $1 million lifetime limit--can continue for generations, during which income is available to the beneficiaries, and the trustee can dip into the principal.

CHECK YOUR WILL FOR HIDDEN TIME BOMBS. "People who did their wills years ago will get caught," says Glenn Greenfader, an attorney with Young Moriwaki Isaacs & Greenfader in New York City. For example, if your will has a provision to exclude the federal maximum of $1.5 million from your estate, you could still trigger the state estate tax under the new laws (the exclusion is now lowered to only $675,000 in New Jersey and $1 million in New York).

In the next few years estate planning will be a moving target, so experts recommend that you review your estate plan annually on your own, and consult a professional every two years.