Editor’s note: Taxes are On Topic in March at FOXBusiness.com. From tips on how to save money when you file to how to avoid an audit, check back throughout the month to find out what you need to know.

The estate tax, commonly referred to as the death tax, is often described as America’s most dreaded.

The estate tax is levied on the taxable assets of individuals after they die. It covers property, liquid assets, life insurance, and trusts. Currently, assets valued at under $2 million are exempt, and then taxed at 45% thereafter.    

There is no way to really avoid the estate tax, but there are ways to ease the transition. Here are three strategies from Bill Beach, director of the Center for Data Analysis, to lessen the burden of the estate tax.

No. 1: Purchase Life Insurance Early

“People recognize that their heirs will be impacted by the death tax, and they buy a life insurance policy that pays out at their death,” said Beach who is also a senior research fellow in economics at The Heritage Foundation. “The family would then use that policy to pay off the taxes. If they are smart, [a person] would do this in their 40s, because once they hit 60-years-old, they will be unable to get affordable life insurance,” he said. 

Beach said that a life insurance policy is the most common way a family can pay the taxes on what they inherit. “My guess is, or my hope is, that most people are over-insured for their estate tax liabilities, so their insurance policies pay that and there will be some money left over for their survivors.”

Some families are taken off guard by the rates of estate taxes, Beach said. “Most people are unaware the estate tax at the federal level is at such high rates. Unless people have a personal tax attorney, they are often unprepared for the taxes,” he said.

No. 2: Incorporate Your Small Business

“People can take their personal business and incorporate it because incorporated businesses don’t pay death taxes,” Beach said. “But, the negative to that is that not everyone wants to have a corporate form.” U.S. corporate income taxes are the highest in the world at 35%, according to Beach.

The problem arises when a small business does not turn a big enough profit to afford corporate taxes. “Let’s suppose you’re a dry cleaner with a fairly narrow profit margin, and though you have enough to keep you and your family comfortable, you can’t pay a corporate tax rate. These people would have to remain a personal business proprietorship,” Beach said.

At the American Family Business Institute in Washington, D.C., President Dick Patten said assets are the main problem facing small businesses.

“Most family businesses don’t have liquid assets. For farmers, their assets are in their land and their tractors, and if you sell those when the taxes hit, then you’ve sold the business itself,” Patten said

No. 3: Give it All Away

Though this option doesn’t really help your heirs, it does keep your money out of the hands of Uncle Sam.

“This is the most commonly used option,” Beach said. “Some people who are very well advised have worked out a way to create trusts, or start charitable organizations. Some of them are very small, with only a $20 million or $30 million principal.” Although the money is not taxed if it is put into a trust or charitable organization, the heirs lose constructive ownership of the funds, according to Beach.

States that Impose Additional Estate Taxes:

In addition to the federal estate tax, some states impose estate taxes or inheritance taxes as well. Those states are: Connecticut, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Washington and Wisconsin, according to a February 2008 study done by the Connecticut Department of Revenue Services Connecticut Office of Policy and Management.

The Future of the Death Tax:

According to the IRS, the current estate tax law allows for a $2 million, tax-free exemption, and anything over that is subject to a 45% tax. Next year, the exemption will go up to $3.5 million, and on Jan. 1, 2010, there will be no estate taxes imposed until Jan.1, 2011. In 2011, the exemption will be $1 million, and the tax rate will be 55%. After that, Congress will review the estate tax again.

“We are in a zone where whoever is elected president will have to deal with the death tax, and that makes it a very current issue for the political race at hand,” Patten said.

“Of course,” Beach said, “We really don’t know all the things that are happening out there to avoid [the estate tax] because if you are intent on avoiding the tax, you’re not going to document for the public how you do it.”

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